Economic Collapse 101: Currency vs. Real Money

gold and silver coinsMost people use the terms “currency” and “money” interchangeably. However, there is a very subtle — but significant — difference between them.

If you’re one of the few folks out there who understand the difference between currency and real money, then I’m positive you also understand what true wealth is. As Mike Maloney notes in Part 1 of his series on the Hidden Secrets of Money:

The whole world has been turned away from real money and fooled into using currency — a deceitful imposter that is silently stealing your two most valuable assets: your time and your freedom.

The truth is, those colorful pieces of paper in your wallet — the ones with pretty pictures of dead presidents and other historical figures on them — aren’t real money; they’re currency. Fiat currency, to be exact.

What’s the difference, you ask? Well, a long time ago, the United States printed paper currency that was real money. Anybody could take those paper bills and legally redeem them for an equivalent amount of physical gold that was sitting in the vaults of the US Treasury. Gold, of course, is a precious metal with real value. Furthermore, the number dollars in circulation was limited by the amount of gold on hand at the US Treasury. In 1933, that changed; thereafter, dollars could only be converted to gold by foreign central banks.

Then, in 1971 the Bretton Woods system collapsed after the United States prohibited the world’s central banks from exchanging their dollars for gold.

The world has been using fiat money — unbacked currency with no intrinsic value — ever since.

Unfortunately, because fiat money isn’t linked to something of real value like gold and silver, it’s extremely vulnerable to becoming worthless. How vulnerable? Eventually, every fiat currency dies.

As the people’s faith wanes in their paper currency, hyperinflation sets in, and the money rapidly loses value — usually annihilating nest eggs that took decades to build.

For a terrific overview on this topic, here is Episode 1 of Mike Maloney’s series on the Hidden Secrets of Money. Mike really knows his stuff and he has a knack for taking complicated subject matter and making it easy to understand.

By the way, if you’ve got the time, I strongly encourage you to check out all of Mike’s other Hidden Secrets of Money episodes as well. You’ll not only learn a lot, but I promise you’ll never look at money — and the world’s financial system — the same way again.

Enjoy!



Comments

  1. 1

    says

    “Gold, of course, is a precious metal with real value.” Why? This is the part of this line of reasoning I can’t grasp. What is it about element #79–versus, say, element #74, tungsten–that makes it inherently valuable? What is the fundamental reason that gold allegedly has “real value” and currency does not? One is a metal, the other is manufactured paper, both two inanimate and not especially rare objects. Why is humans’ perception of gold’s value valid and the same perception of currency’s value invalid?

    • 2

      Len Penzo says

      Ah, yes … You aren’t the only one who has asked that question, Kurt!

      The unsatisfying — but correct — short answer is: because humans have valued gold (and to a lesser degree, silver) for the past 5000+ years.

      In the earliest days, I suspect it was for its beautiful color and rarity. Later on, it was because its unique properties make gold the perfect form of money.

      I will share my additional thoughts regarding your question in more detail next month. So stay tuned.

  2. 3

    says

    Obviously, it’s in a very different category than paper currency, but is it worth noting that gold and silver too are tied to what people are willing to pay for them? Is there any possibility that a day will come where people just decide that they don’t want to accept gold or silver anymore since its intrinsic value — that is, as a metal — can be reproduced inexpensively?

  3. 4

    Jen from Virginia says

    Hey there, Len! This post got me thinking about buying gold and silver through apmex.com again but I have 2 multi-part questions for you. #1a – Considering my income of only 40k per year, I’ll most likely never be able to max out my retirement fund to the max of 23k, so when would be the right time for me to start buying coins if at all? #1b – Should I just focus on contributing as much to my 401k and future Roth IRA as possible or should I be using a percentage for coins, if so how much? #2 – On apmex.com I see coins of the same amount of ounces and same purity but vastly different prices. I’m wondering how much other factors like the rarity of the particular coin and certifications really matter once the dollar collapses and I needed to purchase food with them. Basically, I’m asking how should I compare them and know which ones to buy.

    • 5

      Len Penzo says

      Jen, I am going to reply to you in a personal email for #1a and #1b. As for which coins to buy, I stick to the American coins (American Gold Eagles and Silver Eagles). I also have “junk silver” — US quarters, dimes, dollars and half dollars minted prior to 1965. If want to buy gold coins, you’ll pay the lowest premiums on the 1 oz Eagles — as the size of the coin goes down (0.5, 0.25, and 0.1 oz) the premiums increase. Premiums are slightly higher on the US gold buffaloes.

      For silver, instead of coins, you may want to consider buying 10 oz or 100 oz bars to capture the lowest premiums. If you want to reduce premiums for coins, Canadian silver maples generally have lower premiums than US Eagles and junk silver. I see nothing wrong with the Canadian coins, by the way — I just prefer the US coins.

  4. 6

    Wendell says

    Len,

    One of the counter-arguments to gold is that when there has been a collapse of the economy gold did not become the currency or the means of exchange between individuals. The economy becomes a barter system. The argument is you would be better investing in land to grow crops or bottle water.

    First, is this true? If true, what is the other side of this argument. This is why I am on the fence about buying gold and silver.

    • 7

      Len Penzo says

      Gold has always — ALWAYS — been accepted as a means of exchange, Wendell.

      Barter works, but it’s a terribly inefficient way to trade, which is why people will return as soon as they can to some sort of currency (that will have to be backed by gold or other tangible assets).

      Yes, you can also invest in land, or food, or other items of real value — but the advantage of gold (and silver) is that it gives you more flexibility.

  5. 8

    says

    Len,

    have just been reading a book called Sacred Economics. It discussed pretty much the same ussues you raise in you article (I’ve been thinking about this a lot later as well) but the way the author puts it is fascinating: he compares the way the money departed from value to the way in which the gods left nature to take residence in heaven. The last thing that money left was – ironically – the economy (in 2008).

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