Money and Currency, are they the same?
Most people think that they are the same. When someone gives you some cash, you will think that it is money. It is not !! Cash is simply a medium of exchange for you to buy something that have value. Currency does not have any store value in itself, it is just a medium of exchange.
Money on the other hand, has value in itself. It is also a currency as it can be used to purchase other items that have value. Do you think that the $100 dollar note that we hold is really worth $100? No, the paper dollar note represents the value that is stored somewhere else. Governments around the world has the ability to create money at will without anything to back it up at all. They call it Fiscal policy or QE (Quantitative Easing aka Printing money). The dollar note it is known as Fiat currency.
Where there is an inflation, everything becomes more valuable except currency. Even the price of a cup of coffee increases from 80 cents to $1 in a couple of months…sigh.
History of Money
When human first walked on the surface of the earth, they used barter trade in exchange for food and goods. Then,they used precious stones, gold and silver as a means of exchange. With the introduction of paper money later in history, people use it because it is more convenient and lighter to carry around.
Before the First World War (1914 to 1918),the developed world operated under what is referred to as the Gold Standard. Most of the world’s currencies were pegged to gold and to each other currencies. Business people can predict and forecast plans for the future because they knew exactly what the exchange rate would be in a year time. Gold is the equalizer. It was used to pay for imported goods to a country. As the supply of gold flows out of the country, it causes the country’s economy to slow down and a drop in import demands. As it slows, prices fell and make its goods more attractive to foreign buyers. Gold flows back to the country as foreign demands increases.
In 1933, US President Roosevelt signed Executive order 6260 outlawing the rights of US citizens to owe any gold. The following year, in 1934, President Roosevelt signed another executive order effectively devaluing the dollar. It used to take USD20.67 to buy a 1 ounce of gold. It now takes USD38.00 to buy the same amounts of gold.
On Aug 15 1971, US President Nixon took the United States of America off the gold standard by insisting that he is a staunch believer of free market and started price controls and wages for ninety days.
The Federal Reserve
In 1907, there was a banking and stock market panic in the United States. It was widely believed to be the fault of big New York banks trying to capitalize the stocks by buying the up and selling to the investors during the panic. In 1913, the Federal Reserve Act was passed to the Congress and the Central Bank (Federal Reserve) was created. It creates all the currency, not to the US government but lends it to the government with interest.
The Fed is not managed by the US Government but by bankers, creating fiat currency out of the thin air, without any backing at all. In 2013, the US national debt was $13 trillion dollars, there was a painful history from the past we can learn from.
Weinmar Republic & Hyper-inflation
At the beginning of the First World War, Germany went off the gold standard and stopped its citizens from redeeming their currency (Deutsche mark) for gold or silver. Before the war, the exchange rate was 100 marks to per 1 ounce of gold. However, by 1920, it was 1000 to 2000 marks to an ounce of gold. Germany lost the war and had to pay huge amounts of war reparation payment to France with its gold.
The German government tried to pump tons of currency into the financial system but no one was spending it. The German mark devalued as people lost confidence in the currency and the country went into a hyper inflation. Prices of essential products like bread and food skyrocketed. There was a cartoon drawn about a man pushing a wheelbarrow with stack of German mark to a bakery. When he went to the shop, a robber came and snatched the wheelbarrow and left the stacks of German marks on the street.
It would be wise to save some of our money in tangible assets like precious metals (Gold & silver), because when there is an economic crisis like the Global economic crisis of 2008, the prices of stock and shares will go down, Bonds and precious metals will go up. Precious metals like Gold and silver are tangible and can be stored in the safety of your home.