Fiat Money - A House Built On Sand
Currencies / Fiat Currency Feb 15, 2014 - 04:21 AM GMTBy: Richard_Mills
Warning, I'm not a licensed financial planner, a broker, an analyst, a geologist nor an economist. And I'm also not, as you so often tell me in your e-mails regarding my articles, an English professor. I'm also not a doom and gloomer nor am I a gold bug.
I'm just an investor who believes precious metals are the only financial safety net worth owning and need to be the cornerstone of any generational wealth building program.
Everyone should own gold and silver bullion in the form of coins and bars.
The Incas believed gold was the " Sweat of the Sun" and silver was " Tears of the Moon."
Sweat of the Sun
Early Greeks thought gold was a combination of water and sunlight.
In ancient Egypt, gold was considered the skin or flesh of gods, in particular the Egyptian sun god Ra. Gold was unavailable to anyone but the pharaohs. The Egyptian word for gold was "nub," taken from gold-rich Nubia - shown on the Turin Papyrus as a major gold producer in antiquity.
The first true coins in Western civilization were issued, about 640 B.C., by King Ardys of Sardis. They were small round lumps comprised of electrum (a naturally occurring amalgam of silver & gold) - they were not of any standard weight & purity of metal or size.
The Greeks would not accept the electrum coins in trade so the coins were outlawed by King Croesus (560-546 B.C.) and gold or silver coins were issued. When the Lydians were captured by the Persians in 546 B.C., the use of gold coins began to spread.
"Gold, measured out, became money. Gold's beauty, scarcity, unique density and the ease by which it could be melted, formed, and measured made it a natural trading medium. Gold gave rise to the concept of money itself: portable, private, and permanent. Gold (and silver) in standardized coins came to replace barter arrangements, and made trade in the Classic period much easier...
A monetary standard made the world economy possible. The concept of money, (i.e., gold and silver in standard weight and fineness coins) allowed the World's economies to expand and prosper.
Money had been invented. Its name was gold." ~ A brief History of Gold, onlygold.com
There are more than 400 references to gold in the Bible, including specific instructions from God to cover furniture in the tabernacle with "pure gold."
"By the late 13th century it was the city state of Venice that controlled trade throughout the Mediterranean. And the Venetians knew that if they wanted to consolidate and further increase their power and influence that they needed a coin that would be accepted by all nations. For such a coin would allow trade to flow freely and easily and greatly facilitate payment for goods.
Many references list Giovanni Dandolo as the originator of the Venetian ducat in 1284. But it was actually in 1274 when the Doge of Venice, Lorenzo Tiepolo, began minting a gold coin with the image of the Doge kneeling before St. Mark on the obverse and the figure of Christ on the reverse - and thus the gold ducat was born. It was a coin weighing 3.5 grams and struck in .986 gold. These specifications for the ducat would remain the same for the next 700 plus years. It continues to be struck even today. Not since the Roman Empire, had a coin of gold been struck that would capture the trust of all nations and be as enduring as the ducat.
The popularity of this coin quickly spread throughout Europe and even beyond to most areas of the Middle East and including India, Egypt and Africa. For here, at last, was a coin that allowed any nation of the world to trade with another and have a uniform method of payment. In all cases, the specifications of the coin were the same - 3.5 grams of .986 gold. In later years, the ducat was also struck in fractions and multiples - from as small as 1/32 ducat to as large as the extremely rare 100 ducats...
Today, the US dollar is the currency that is accepted worldwide; and before the dollar it was the British pound. But the gold ducat stands out above all other coins as having achieved acceptability over the known world based on its reputation and specifications. For centuries the ducat held the position of being the world's currency. No other coin can make that claim." ~ The Ducat, Doug Prather winsociety.org
The world's first hallmarking system, scrutinizing and guaranteeing the quality of precious metal, was established in 1300 at Goldsmith's Hall in London - where London's Assay Office is still located today.
In 1422 the Venice Mint struck a record 1.2 million gold ducats using 4.26 tonnes of gold from Africa and Central Asia.
Gold was one of the gifts of the Magi and almost all of the gold that has ever been mined still exists.
Sixty-five percent of all gold in circulation has been extracted since 1950. Seventy-five percent of all gold in circulation has been extracted since 1910. Over 90 percent of the world's gold has been mined since the California Gold Rush.
The annual worldwide production of gold is approximately 2,810 metric tons or 90 million troy ounces per year - the world pours more steel in an hour than it has poured gold since the beginning of recorded history.
U.S. Dollar Better Then Gold
In July 1944, delegates from 44 nations met at Bretton Woods, New Hampshire - the United Nations Monetary and Financial Conference - and agreed to "peg" their currencies to the U.S. dollar, the only currency strong enough to meet the rising demands for international currency transactions.
Member nations were required to establish a parity of their national currencies in terms of the US dollar, the "peg", and to maintain exchange rates within plus or minus one percent of parity, the "band."
What made the dollar so attractive to use as an international currency was each US dollar was based on 1/35th of an ounce of gold, and the gold was to held in the US Treasury. The value of gold being fixed by law at 35 US dollars an ounce made the value of each dollar very stable.
The US dollar, at the time, was considered better then gold for many reasons:
- The strength of the U.S. economy
- The fixed relationship of the dollar to gold at $35 an ounce
- The commitment of the U.S. government to convert dollars into gold at that price
- The dollar earned interest
- The dollar was more flexible than gold
There's a lesson not learned that reverberates throughout monetary history; when government, any government, comes under financial pressure they cannot resist printing money and debasing their currency to pay for debts.
Lets fast forward a few decades...
The Vietnam War was going to cost the US $500 Billion. The stark reality was the US simply could not print enough money to cover its war costs, it's gold reserve had only $30 billion, most of its reserve was already backing existing US dollars, and the government refused to raise taxes.
In the 1960s President Lyndon B. Johnson's administration declared war on poverty and put in place its Great Society programs:
- Head Start
- Job Corps
- Food stamps
- Medicaid
- Funded education
- Job training
- Direct food assistance
- Direct medical assistance
More than four million new recipients signed up for welfare.
During the Nixon administration welfare programs underwent major expansions. States were required to provide food stamps. Supplemental Security Income (SSI) consolidated aid for aged, blind, and disabled persons. The Earned Income Credit provided the working poor with direct cash assistance in the form of tax credits and welfare rolls kept growing
"The problem with Socialism is that eventually you run out of other people's money." ~ Margaret Thatcher
Bretton Woods collapsed in 1971 when Nixon severed (known as the Nixon Shock because the decision was made without consulting the other signatories of Bretton Woods, even his own State Department wasn't consulted or forewarned) the link between the dollar and gold - the US dollar was now a fully floating fiat currency and the government had no problem printing more money.
Tears of the Moon
In the time of the ancient Babylonians - long before the periodic table - there were seven sacred metals: gold, silver, copper, iron, tin, lead and mercury.
In Roman and Greek Mythology, the First Age was called Golden, the Second Age Silver. Apollo, the god of truth and light, and teacher of medicine, carried a silver bow.
The hieroglyph of Isis (Egyptian moon goddess) is a crescent and images of her are usually reproduced with her standing on the Crescent. This has also become the symbol for silver - on old maps a crescent shows the location of a silver mine.
Islamic alchemy gave silver an important place, alchemical procedures were defined in terms of silver - the silvering of other metals, the act of giving other metals silver like qualities.
We've long practiced the science (metallurgy) of separating silver from lead - the earliest known workings of any significant size were those of the pre-Hittites of Cappadocia in eastern Anatolia, the first sophisticated processing of lead-silver ore was attributed to the Chaldeans around 2500 B.C.
Silver metal was recognized as more precious than gold when bartering in ancient Egypt - this recorded as early as 930 BC. Silver's use as money in coin form began around 2600 years ago. The Lydian (present day Turkey) Trite is considered by many experts to be one of the first coins used as money. It was made of "Electrum", a silver and gold mixture. Egyptian silver in coin form began appearing around 300BC.
Crime of '73
In 1873, the Fourth Coinage Act was enacted by the US Congress. Western silver miners labeled this measure the "Crime of '73" because it stopped the printing of US silver dollars. The US had, unofficially, abandoned its bimetallic standard in favor of a monometallic one - gold.
The supply of silver not being used for coinage increased - European Nations had just gone from a silver to a gold standard, the US was no longer coining silver dollars and these two factors, when coupled with massive new silver discoveries in the American west, caused the price of silver to collapse.
Western miners, seeking the right to turn silver directly into money, mid-western grain and southern cotton farmers (who both had immense debts because of price deflation caused by overproduction) rallied to silver's cause and the movement became known as Free Silver. The Populist Party had a strong Free Silver element and its merger with the Democratic Party moved Democrats from being in support of a monometallic gold standard to the Free Silver position.
Free Silver supporters were called "Silverites."
Silverite's argued that silver should continue to be part of the monetary standard with gold, their slogan was "16 to 1" - sixteen ounces of silver would be equal in value to one ounce of gold, using the ratio established in the Coinage Act of 1834.
Silverites also wanted "free coinage of silver" as authorized under the Coinage Act of 1792. Free coinage meant anyone who possessed uncoined gold could bring it to one of the United States Mints and trade it for its equivalent in gold coins, less a small deduction - Free Silver advocates wanted the mints to accept silver on the same principle. These inflationary measures would have increased the amount of money in circulation and helped debtors pay off their debts, while harming creditors and savers.
Opponents to the Free Silver movement were mostly the financial establishments of the Northeast - the moneylenders, creditors, banks, leaseholders, and landlords - they backed a monometallic gold standard - the expanding economy had constrained the money supply available on a gold only standard, this had made the dollar stronger and decreased prices, opponents of Free Silver wanted to keep it that way.
The Republican Party was against Free Silver, the party's position being that the best way to national prosperity was "sound money." Republicans favored a continued strong dollar, which rewarded savers and creditors.
Battle lines were drawn, on one side were the Free Silver proponents - miners, farmers, debtors and Democrats - who wanted a bimetallic standard, the free coinage of silver and inflation. On the other side of the line were the creditors and Republicans who wanted to keep a strong currency using a gold only standard.
Intense pressure caused the U.S. government to agree to the Bland-Allison Act of 1878, this act directed the Treasury to purchase silver at a high price. The Sherman Silver Purchase Act was enacted on July 14, 1890. It didn't authorize the free and unlimited coinage of silver that the Free Silver supporters wanted, but it did increase, by a large amount, the amount of silver the government was required to purchase every month.
Using a special issue of Treasury Notes that could be redeemed for either silver, or gold, the US government became the second largest silver buyer in the world - after the government of India.
By 1893 the US was in one of the worst depressions in American history and people were turning in the new Treasury Notes for gold and depleting the government's gold reserves. President Grover Cleveland (R) forced the repeal of both the Bland-Allison and Sherman Silver Purchase Acts.
Conclusion
"Jesus ends the Sermon on the Mount (Matthew 5-7) with a parable everyone should heed. He says a man built his house and considering the good and bad times, the calms and the storms, he built it upon a rock. And when the wind blew, the waters rose and the floods came, it was able to survive the storms for he built on a firm foundation. Jesus then tells of another man who built his house on sand. The winds blew, the rains fell, the floods came and washed away that man's home.
Aesop passed on a fable from ancient Greece that implied the same thing. He tells of three little piggies who went out to face the world. One built his house with straw, another with sticks and the other with bricks. When the wolves came, they easily destroyed the straw house and the house built with sticks. Children's faces light up at the end of the fable. The last, wise pig built his house out of brick. The big bad wolf came and "huffed and puffed" trying to blow the house down. The wolf then climbed the roof and came down the chimney, only to find the wiser pig had built a fire under a boiling cauldron and the wolf fell in and the pig ate the wolf instead of the wolf eating the pig." ~ Bob Cuttino, ' Weathering the storms of life'
The history of fiat money has always been one of failure. Every fiat currency since the Romans started diluting the silver content of their denarius has ended in devaluation and eventual collapse of both the currency and of that particular economy.
Silver and gold have stood the test of time, as a medium of exchange, a storehouse of value and a safe haven in times of turmoil.
For the very first time in our history, all money, all currencies, are now fiat - the US dollar use to be gold backed and it was the rock all the worlds currencies were anchored to - when the US dollar became fiat, all the worlds currencies became fiat.
Thankfully, using history as our guide we know all about the benefits of owning gold. Gold and silver act as the go to safe haven. Gold and silver will preserve our purchasing power throughout whatever wickedness comes our way - they are the rock upon which our families future generational wealth has to be built on.
Politicians dilute for war and favor, as a consequence every fiat currency throughout history has failed the test of time . The big bad wolf is never long off the hunt. Are gold and silver on your radar screen?
If not, it should be.
By Richard (Rick) Mills
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