Monday, June 27, 2011

The Life Cycle of Money

Many are becoming increasingly alarmed by the way western governments are currently managing fiat currencies. A growing number of analysts and media pundits have been highlighting the debasement of currencies via quantitative easing and other massive money creation schemes worldwide. This Keynesianism on Steroids approach to global economic recovery is fast tracking all nations to ever-increasing rates of inflation. This said, monetary debasement is not a new or recent phenomenon; in fact it is the natural life cycle of money.

There are seven stages in the life cycle of money that every dominant civilization has followed for the past 5000 years of recorded history:

A Free Market Emerges

Societies organize and begin to function with a basic barter system for trading goods. Incipient barter is a direct exchange of goods for goods. Goods are defined as wealth, and wealth is produced when humans apply labor to extract natural resources from the earth. As the civilization progresses, services become valued and are bartered. Other than hard assets, real estate, and sundries, many necessary items are highly perishable, so there is limited savings and investment. In this case, the goods and services that a person barters and the perceived value of those particular entities in the community represents the productive capacity of individuals, groups, and family wealth.

Free Market Money Emerges

After a barter / exchange economy is well-established, a society progress to the concept of free market money and a currency system emerges. Having a recognizable, reliable, and uniform unit of monetary exchange makes it simpler to conduct commerce, business, and trade within and between communities and societies. Traditionally, these monetary systems have been based on hard assets that were highly valuable, scarce, easily commoditized, durable, and easily transportable. Because of this, the primary currencies of choice, for the past 5000 have been gold and silver. Many civilizations have selected precious metals as their natural monetary foundation based on common sense and reason, in many cases independently of each other. Aristotle laid out the following criteria for the perfect money nearly 2500 years ago: It must be durable, portable, divisible and consistent, and have intrinsic value. As such, gold has been determined, over human history to be the best store of value because of its relative scarcity; it can be minted in uniform pieces; it is small enough to transport great distances; it does not tarnish or corrode; and it is easily stored. Although not as immutable or scarce as gold, silver often has served as the primary instrument of monetary trade and exchange, often functioning as the poor man’s gold. .

Government Emerges and Regulates the Free Market

Communal order is needed in a functional society and therefore, some type of government is formed. As societies become increasingly complex, industrial and populous, the government naturally seeks to expand their influence and control over business, commerce, and the market. Laws, rules, and regulations are instituted to regulate and control trade through tariffs, taxes, quotas, and penalties. Taxes are imposed to support the government agenda and as a means to control of wealth. Society is moved away from a free market and operates in a growing regime of regulation of the marketplace and money supply.

Government Monopolizes Money Supply

The government takes control of the money supply and sets up a currency system by issuing official coinage from a central mint. It controls the size, design, weight, and purity of the coinage. The government may issue paper promissory notes redeemable in coinage and decrees these notes are exchangeable for goods or services. This money is called a "fiat" currency, meaning "by decree". Backed by law, the government owns the money and allows its citizens to use it as a medium of exchange. Citizens and banks are forbidden to compete with the government by creating or issuing private money..

Government Debases the Money

Government must increase taxes to support its continuing growth and the citizens object to increased taxation and seizure of their wealth. In order to fund itself and to soften dissent from higher taxes, the government finds itself in a position that in order to maintain social spending, it begins to debase the value of money. Historically governments have shaven off pieces of coins, issued smaller coins, or made coins with less gold and silver content. Eventually it removes all precious metals from the coinage. Ultimately it declares that its promissory notes are no longer redeemable in precious metals. At this point, there is no hard asset backing or basis to the monetary system.

Issuing more money with no precious metals backing allows the government to create money at will for its own purposes. No longer able to support runaway spending, the military / industrial complex, and welfare state entitlements, through taxes, governments print more money into existence and continue to spend. When the money in circulation increases but the availability of goods and services remain the same, the prices for the goods and services increase. The increased money supply results in dilution of the purchasing power of the currency, which is the true nature of inflation, robbing citizens of wealth and savings through decrease in purchasing power. The hidden secret of inflation is that it is really just another tax. If the government can’t raise taxes due to popular resistance, it simply prints money, and passes along the cost of running the state and all its sucklings to the people through inflation.

Non-Confidence and Collapse of Money

Inflation, debt, and deficit increase and citizens realize that the fiat money representing their labor, savings and wealth is rapidly losing its value and purchasing power. By-products of poor money management such as food inflation and shortages, personal debt, and civil and political unrest begin to accelerate. This leads to a confidence crisis and currency collapse.

The Re-Emergence of Gold and Silver as Money

Citizens desire to return to a monetary system more secure and less inflationary. They realize that gold and silver offer safe haven for preservation of value and wealth and an insurance policy against current and future currency debasement. People demand more gold and silver and accumulate the metals as a key component of their overall wealth within the society.

By observing the history of past states and accurately recognizing our current position within the cycle of money, we can make informed decisions and position ourselves to mitigate the risk and maximize the opportunities that come with currency collapse.

Throughout history, even though it is through government intervention and mismanagement of the monetary system that causes the money to enter a cycle that leads to its ruin, the burden of dealing with the negative outcome always rests on the shoulders of the people.

Western governments have debased money without gold and silver backing for the past forty years. Banks are failing or are being bailed out by governments issuing more money. Repeated currency crises, food inflation, rioting, and the overthrow of oppressive governments are on-going. Clearly we have entered Stage 6 of the Life Cycle of Money: Non-Confidence and Collapse.

We now have an opportunity to acquire physical gold and silver at relatively low prices. Gold and silver supplies are limited. As more and more citizens flock to gold and silver to protect their wealth, prices will soar. For that reason, I urge you to consider making physical gold and silver an integral part of your net asset portfolio sooner rather than later.

By, Kirsty Hogg

Goldvestments Copyright (c) 2011

A lecture by Philip Judge "Life Cycle of Money" 2010. 

Philip is the author of "Stories from the Desk of a Bullion Banker". 

This entry was also published at 24hGold.