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IPFS News Link • Currencies

Why Debt is Not Money

• https://www.lewrockwell.com - Doug Casey

Gold's main use, contrary to the belief of some, isn't in jewelry or dentistry—although those uses are important. Its main use has almost always been as money. But gold's ancillary uses are growing in importance because, given its physical characteristics, it's a high-tech metal. It's one of the most resistant to chemical reaction, one of the most ductile, the most malleable of all the elements, and it's an exceptional electrical conductor.

There are lots of other advantages to gold as money. It's by far the most private kind of money; gold coins, unlike paper currency, don't even carry serial numbers. That makes it truly untraceable. At current prices, it's more portable than cash, even in the form of $100 bills. It doesn't retain traces of drugs, as does currency, which makes it less liable to arbitrary confiscation. Although efforts have been made to counterfeit gold bars, with tungsten filler and such, it's much easier to authenticate than currency.

Until quite recently, 90% of the world's people were either flat-out prohibited from owning gold (Russia, China, and the rest of the ex-communist world) or simply too poor to consider it (most Indians and other residents of the Third World). But these people are now allowed to own gold and have a fast-increasing ability to buy it. And they're rapidly doing so. Their cultures have long histories with the metal and recent histories of living in a police state; they understand the value of real money. Although common people are now the biggest gold buyers, their governments and central banks are accumulating it as well.

I expect that gold will soon become the preferred medium of exchange for many. Early adopters will include dealers in drugs, armaments, and other prescribed merchandise; these folks are very security-conscious. They will be joined by all manner of people who just want to do business below the government radar. And in the years to come, paper currency is gradually going to be eliminated by governments in favor of debit cards, credit cards, and other media of electronic transfer. Governments prefer these things, for obvious reasons. People, therefore, are going to need a private way to trade when paper cash is unavailable.

It's not just that cash will be harder to come by and harder to use. People won't want to hold it as inflation gets serious; as U.S. dollars are increasingly viewed as hot potatoes, people around the world will gradually go to gold. In 100 or so countries, the dollar is already the de facto currency for large purchases and long-term saving. What will people in these countries do as the dollar starts losing value rapidly? They won't go back to their local currencies; their only reasonable alternative is gold. All these things will add to demand for the metal. This is good news for those who own gold in size now.

Almost everybody, even gold bugs, has far too little gold. Most people have no gold at all. Pity the poor fools. Gold is going to be reinstituted as money within our lifetimes, simply out of necessity. But that can only happen at higher prices since only about six billion ounces exist above ground in the entire world.

Debt

Now that we've defined what money is, let me further define what money is not: debt. All U.S. dollars, which is to say Federal Reserve Notes, are debt. They are neither redeemable for anything by their issuer, nor is there a limit on how many can be created. They represent only a vague claim against the "good faith and credit" of the United States government, which is to say the government's ability to extract taxes from its subjects. But Uncle Sam has shown himself to be remarkably lacking in good faith and is currently embarked on a course to destroy his credit.

The dollar is literally an "IOU nothing." It's true that your grocer and your barber have to accept the dollar because of "legal tender" laws, and because they currently wouldn't know what else to take in payment. But that's not true of foreigners, who own something like six trillion dollars.

Paper money is excellent means for governments to tax people indirectly, surreptitiously, through inflation. That's one reason central bankers love paper money, but also, phony economic theories, like those of John Maynard Keynes, hold that the government not only can but should meddle with the economy, and the ability to print paper money gives them a means to do that.

In today's world, not only do people around the world take it for granted that paper is money, but that it should be so.

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