The Phaserl


Don’t Make This Gold Mistake

from GoldSeek:

When I was a lad studying economics in between bouts of playing blues guitar, surfing, and drinking fine Namibian lager, professors taught my classmates and me the origins of paper money. Like the beginners we were, we Economics 101 students trusted and believed them.

Years later, when I was a postgrad in Economic History, I learned that my professors were wrong. Their account of the origins of paper money was based on theoretical wishful thinking rather than real world history. When you studied actual events, you found that things weren’t so simple.

My professors believed what they were teaching to be true because it was an elegant and logical explanation, and because their professors had taught it to them. That same trust in elegance and logic characterizes many people today when it comes to owning gold.

That’s a big mistake.

Paper Isn’t Metal

The standard explanation of the origins of paper money sounds plausible, but it isn’t the whole — or even the main — story.

In the old days, the wise greybeards explained, money always took the form of a precious metal, usually gold. People would exchange gold coins for goods and services. That meant they had to carry those coins around with them, which was dangerous. So goldsmiths started offering secure storage services for a small fee.

It was a hassle to go to the goldsmith every time you needed to transact, so the smiths started issuing paper certificates of deposit in various denominations. In theory, every piece of this paper was fully backed by gold stored with a smith somewhere, and you could go get it if you wanted. The certificates derived their value from the underlying value of gold.

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