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Metallic Money (Gold/Silver) vs. Credit Money: Know The Difference

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Longtime correspondent Jeff W. succinctly explains the difference between metallic money (gold and silver) and credit money.

You've probably read many articles about money--what it is (store of value and means of exchange) and its many variations (metal, paper, etc.). But perhaps the most important distinction to be made in our era is between metallic money and credit money.

Longtime correspondent Jeff W. succinctly explains the difference between metallic money (gold and silver) and credit money:

We use credit money every day. It’s the only kind of money we have. But because people in Europe and America have historically used metallic money for over 2,500 years, we still have cultural habits that come from the gold money era.

When the U.S. removed gold and silver coins from circulation in the 1930’s and 1960’s and replaced paper gold certificates and silver certificates with Federal Reserve notes, the paper money looked very much the same. But the thing that the paper money represented changed dramatically. The paper money now represents units of credit money that have no guaranteed relationship with the prices of gold or silve r or anything else.

Because the nature of credit money and metallic money are not well understood, and because money is so important in our lives, it is worthwhile to examine and discuss how these two kinds of money are different.

1. Tangible vs. intangible. A gold or silver coin is a physical object that has weight, volume and physical characteristics. Credit money is a record of the existence of a debt. Credit money exists in the intangible world of information and human relationships. Where Mr. A owes Mr. B a specified unit of money, and where that debt is recorded on paper or another recording medium, and where the record of that debt passes from one person’s possession to another as a medium of exchange, you have credit money.

Gold coins are minted; debts are recorded. The two forms of money could hardly be more dissimilar.

2. Old vs. oldest. Metallic money has been used by people for about 2,600 years. It has been used sporadically and in certain places. Credit money has been used for at least 5,000 years, when people first started recording debts on clay tablets, pieces of wood or ivory, etc., and trading those IOU’s as money. Before debts were recorded in writing, they were, in prehistoric times, discussed verbally, remembered, and sometimes traded in verbal transactions. This is how very primitive people still trade using debt today.

3. Persistent vs. ephemeral. Some gold coins more than 2,000 years old are still in existence today. But it would be very rare for any performing loans to be more than 100 years old, and many loans are of very short duration. Much of the U.S. Treasury’s debt issue is very short term, lasting only 90 days or one year. Where gold coins can last for thousands of years, debts are constantly coming into existence and going out of existence.

The U.S. debt holdings of the Federal Reserve are constantly churning and rolling over, whereas gold holdings in vaults can lie stationary and do not need to be replaced or rolled over.

4. Hard to create vs. easy to create. To create a gold coin, someone has to first mine the gold from the earth, refine it, mill it, stamp it into circular shapes and then stamp the governmental pattern on it. To create a piece of credit money, a debt has to be created and then a piece of paper printed or a record created on a computer. Anyone who has no intention of paying back his debt, such as the Federal government, can potentially issue debt in infinite amounts. There is an issue of whether that debt is worth anything, however.

5. Always good vs. sometimes good. A gold coin that is legal tender will always be accepted as money. With credit money, some of it is good and some of it is bad. In recent years Zimbabwe’s credit money went bad. Before that, the Weimar Republic’s credit money became worthless. All circulating debt has a mixture of good and bad. When a lot of it goes bad at the same time, it causes a crisis, where the “toxic debt” must be guaranteed or purchased by government or else banks and other financial institutions will go bankrupt.

6. Non-interest bearing vs. interest bearing. Most debt specifies interest payments as part of the loan agreement. The Federal Reserve notes we use as money are claims on interest-bearing debt owned by the Federal Reserve. Credit money has the quality that there is a continuing flow of interest payments away from the users of money in the general population and toward creditors. There is no such continued flow of wealth from debtors to creditors in a gold money system.

7. Does not need money supply expansion vs. needs expansion. Because interest payments are constantly flowing out from families, businesses and communities to financial centers and wealthy creditors, credit money results in economic sluggishness unless there is a constant expansion of the supply of credit money. Under a gold money system, people can function much better with a constant money supply because there is no leakage of interest payments. Each community can continue to circulate its own holdings of gold money without having to pay any of it out in the form of interest payments.

8. Government does not need to enable creating more debt vs. government must enable debt creation. In order to keep a credit money economy going, more debt must be continually created. Government and financial leaders who do not want to be blamed for a downward spiral of slowing economic activity must see to it that more debt is constantly being created. Under a gold money system, there is no pressure to constantly increase the burden of debt.

9. Not as bubble prone vs. more bubble prone. The fractional reserve method of banking encourages asset bubbles because new money is created as borrowers take out new loans. When people borrow money to buy bubble assets (e.g., houses 1981-2006), it creates enormous amounts of new money to feed the asset bubble. Many asset bubbles were also created during the gold money era due to fractional reserve banking, but where the unit of currency is guaranteed by government to be equal to a fixed weight in gold, the inflation threat is taken out of the picture and that restrains bubble creation somewhat.

To support the value of their currencies under a gold money system, governments must also often raise interest rates in order to encourage investors to sell gold in exchange for bonds paying good interest. Higher interest rates also discourage the formation of asset bubbles.

10. Does not enable ZIRP vs. enables ZIRP. A zero interest rate policy is impossibl e under a gold money system. The demand for gold would soon deplete government’s gold holdings to zero. Under a credit money system a policy of low interest rates and financial repression can be imposed for an indefinite period of time.

11. Does not increase lending activity vs. increases lending activity. Low interest rates and the ease with which credit money is created lead to increased lending activity and higher debt loads. Under a gold money system, debt will necessarily be created at a slower rate. By stepping up the pace of debt creation, a credit money system serves the interests of the banks.

12. Has no problem with debt saturation vs. has serious problems with debt saturation. Continually increasing debt leads ultimately to debt saturation. When a country’s people and businesses are saturated with debt, it makes it much more difficult to continue to increase the debt load. That leads to stagnation and slowing economic activity in a credit money system. A gold money system does not tend to lead to debt saturation and has no similar problems with debt saturation.

13. Increases wealth disparities vs. does not increase wealth disparities. The higher debt load facilitated by a credit money system results in greater flows of wealth from the debtor class to the creditor class. The higher debt load leads to increased disparities in income, more very poor and very rich and fewer of the middle class.

14. Holds its value vs. does not hold its value. Gold-backed currencies have an excellent track record of holding their value. Credit money tends to inflation, the rate of which largely depends on how fast new debt is being created.

15. Government as a guarantor of savings vs. government provides no guarantee. One of the three functions of money is as a store of value. (The others are a medium of exchange and a unit of account.) When the U.S. government guarantees that 35 U.S. dollars will buy an ounce of gold, as it did in the years 1934-67, government aid savers by acting as a guarantor of that store of value.

When the U.S. went off the gold standard in 1971, it changed the relationship between citizens and their government when government no longer provided that guarantee.

16. Defaulters are bad vs. defaulters are only partly bad. In a gold money system, a person who takes out a loan and does not repay it is considered a bad person, almost a thief. He has robbed his creditors of the money they were rightfully owed. In a credit money system, however, the creation of new debt is so important that anyone who goes into debt is a hero of the economy.

That is why under a debt money system, it is considered more important that new debt be created (e.g., as student loans) than to worry about whether they will ever be paid back or to pin blame and guilt on loan defaulters.

Conclusion: As we see, it is no exaggeration to say that the transition from gold money to credit money changes everything. It changes every individual’s relationship with his own money, with government, and with banks. It changes the power relationships within society. It changes the patterns of ownership and wealth accumulation.

It is very important that citizens and investors understand the credit money system that they are trying to operate within. For people with over 2,500 years of experience with gold money, it is difficult to understand it and get used to it. But anyone who does understand it will be better off because of making better-informed decisions. We might as well get used to it because we shall likely have to live with a credit money system for a very long time.

Thank you, Jeff, for an insightful and extremely important overview of the critical differences between credit money and gold/silver. The key distinction of all these important distinctions is the ephemeral nature of credit-money (and any form of fiat currency). History teaches us that a financial-political crisis of sufficient magnitude reveals the underlying value of credit-money--i.e. zero--in a brief but cataclysmic loss of faith/trust.

As correspondent Harun I. observed in Why Is Debt the Source of Income Inequality and Serfdom? It's the Interest, Baby: "Governments cannot reduce their debt or deficits and central banks cannot taper. Equally, they cannot perpetually borrow exponentially more. This one last bubble cannot end (but it must)."

When the current bubble bursts, the difference between metallic money and credit money will be starkly visible: no one will trade gold or silver for any amount of paper/credit money, and the ephemeral financial instruments ("assets") that dominate today's financial system will be revealed for what they are: phantom promises of value.

Of related interest:

Gold: The Once and Future Money by Nathan Lewis

Could Bitcoin (or equivalent) Become a Global Reserve Currency?
November 7, 2013

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Fri, 11/29/2013 - 19:21 | 4200686 stopcpdotcom
stopcpdotcom's picture

Credit money is not money, it is currency.

Real money - precious metals - is a store of wealth.

Currency is not a store of wealth - it depreciates over time.

 

Fri, 11/29/2013 - 19:35 | 4200706 fonestar
fonestar's picture

Meanwhile mtgox.com is telling me Bitcoin is $1210 USD?  I thought you said it had "collapsed"?  Please help me I am confused.

Fri, 11/29/2013 - 19:38 | 4200716 dick cheneys ghost
dick cheneys ghost's picture

I heard the Saudi's are considering trading oil for invisible coins......hahahahaha

Fri, 11/29/2013 - 19:47 | 4200728 fonestar
fonestar's picture

So if we were able to shrink ourselves small enough (to the sub-atomic level) would you still say that electrons do not exist?  Face it, even your definition of "tangible" is completely relative.

It's just that most of you are too stupid to understand that.

Fri, 11/29/2013 - 19:49 | 4200731 SimMaker
SimMaker's picture

You are a religious fanatic. And an idiot too.

Fri, 11/29/2013 - 19:50 | 4200736 fonestar
fonestar's picture

If I am an idiot, debunk a single thing I have claimed....

 

 

....waiting

....waiting

....waiting

Fri, 11/29/2013 - 19:56 | 4200750 dick cheneys ghost
dick cheneys ghost's picture

your so-called bitcoin wealth exists only in your mind.........

Fri, 11/29/2013 - 20:01 | 4200759 fonestar
fonestar's picture

Perhaps you are right.  You should read on Heisenberg and the uncertainty principle.

What I care about is the fact that others agree.  Vires in numeris.

Fri, 11/29/2013 - 20:25 | 4200815 dryam
dryam's picture

Do you really feel compelled to submit a million posts saying how great bitcoin is?

If someones is truly weathy, they don't talk about how rich they are.

If someone is truly good looking, they don't about how good looking they are.

If someone is truly tough, they don't talk about how tough they are.

Get the point? 

Fri, 11/29/2013 - 20:27 | 4200819 fonestar
fonestar's picture

Again, this is not about being wealthy, content, poor or whatever else.  You can expect the exact same from me when Bitcoin reaches five, six and seven figures.

Fri, 11/29/2013 - 20:33 | 4200834 dryam
dryam's picture

You sound defensive and unsure of yourself.

Fri, 11/29/2013 - 20:44 | 4200856 fonestar
fonestar's picture

I thought Bitcoin had collapsed?  Now please answer the question.

Fri, 11/29/2013 - 21:26 | 4200935 dryam
dryam's picture

Bernie Madoff's investors had incredible returns for many years and some actually cashed out and got rich.

Sat, 11/30/2013 - 08:18 | 4201638 GetZeeGold
GetZeeGold's picture

 

 

 

I still have some BernieCoins......but I just keep them as souvenirs.

 

Fri, 11/29/2013 - 23:52 | 4201202 disabledvet
disabledvet's picture

you will never see me down arrow you fonestar...ever. I even have a "fonestar theme and scene"...just for you. http://www.youtube.com/watch?v=RI0i_tL-8aU

Sat, 11/30/2013 - 02:24 | 4201426 StillSilence
StillSilence's picture

Five, six, seven or twelve figures won't matter when those figures are measured in debt notes which will exponentially create or die. At a certain point you are left with whatever you might have attained with those debt notes. House, land, car, food, PMs, bitcoin. Question is what rises when debt fails.

When you see "intrinsic," think three dimensional world tangible accountability of an object. Like any other good or service that is available to exchange in commerce on this planet, it needs to actually be felt by the consumer.

The whole concept of money is based on real world production of these goods and services and way to accuratley represent them. It can incorporate technology and be exchanged using it (just like a check can be mailed, just a bit slower) but it cannot be based soley on that technology.

Im not saying bitcoin is "bad," but it cannot ever become "real money" in terms of what the world uses in majority (remember most people are still operating predominatley in the physical realm and after they lose most everything will not likely trust in a crypto currency.)

SOMETHING will be adopted or accepted as money after debt failure is widely seen. Again the question is what and will you want to be holding it before it happens.

Sat, 11/30/2013 - 15:15 | 4202157 fonestar
fonestar's picture

Bitcoin will function as a transfer of payment system both before and after the dollar.

Sat, 11/30/2013 - 15:47 | 4202217 tarsubil
tarsubil's picture

Will I be able to buy a space ship with bitcoins? I want a space ship.

Sat, 11/30/2013 - 18:53 | 4202537 StillSilence
StillSilence's picture

Perhaps, but it will not replace dollars. The big question to me is what will the need be for a crypto currency if a sound money system is ever restored. Admittedly I am unsure, but far less so about what the world banking system will use if/when real money is brought back into it. 

Sat, 11/30/2013 - 05:49 | 4201576 MeelionDollerBogus
MeelionDollerBogus's picture

you mean 0.0000001 of a dollar? Ya, I can picture that easily. That's 7 decimal places, where they truly belong.

Fri, 11/29/2013 - 21:56 | 4200979 Greenskeeper_Carl
Greenskeeper_Carl's picture

^this^ i really dont have any problem with bitcoin. i wish it, and any alternative to our central banker fiat system, the best, but come on dude, give it a rest. i can picture this guy lurking over this site, and probably others, wearing a dirty bathrobe and a pair of slippers, eatign cereal out of a giant popcorn-type bowl in his moms basement, eagerly awaiting any thread he can jack to talk up bitcoin.

Fri, 11/29/2013 - 20:25 | 4200813 Professorlocknload
Professorlocknload's picture

Bitcoin=Credit

Fri, 11/29/2013 - 20:27 | 4200817 dryam
dryam's picture

No.

Bitcoin=Credit=Ponzi

Fri, 11/29/2013 - 20:47 | 4200860 fonestar
fonestar's picture

It seems that you believe you can reassign terms you do not understand?  You can do that, it's just that people will think you're crazy or have no idea what you are talking about.

Sat, 11/30/2013 - 05:07 | 4201550 MeelionDollerBogus
MeelionDollerBogus's picture

You are the one who is re-assigning to fit your belief system.
The definitions given to you are iron concrete laws of nature & you are pretending it is not so.
That is called Fail(tm).

Fri, 11/29/2013 - 20:28 | 4200824 fonestar
fonestar's picture

If you borrow against Bitcoin you could create credit.  Bitcoin itself is obviously not credit.

Fri, 11/29/2013 - 20:31 | 4200829 nmewn
nmewn's picture

Again, does it need something else to function?

Money never does.

So what is it?

Fri, 11/29/2013 - 20:52 | 4200873 fonestar
fonestar's picture

Money itself is only a biproduct of human conciousness.  Things like gold, silver and copper have properties that make them useful as an ideal money to humans.  Remove the human and they cease to be money.

Fri, 11/29/2013 - 21:12 | 4200910 nmewn
nmewn's picture

"Remove the human and they cease to be money."

Without humans, there is no concept of money.

So, do you have a problem with money or people?

Fri, 11/29/2013 - 22:00 | 4200991 Xibalba
Xibalba's picture

Keceph anah...

Remove the human and money remains money. Humans do not determine what money is. Money is not relative. Money is not what you think it is.

Fri, 11/29/2013 - 22:21 | 4201024 dark pools of soros
dark pools of soros's picture

I think our lizard overlord has spoken

Fri, 11/29/2013 - 22:23 | 4201027 fonestar
fonestar's picture

So are you claiming there is something inside gold and silver itself that is innately valuable?  Perhaps magical?

Or is it perhaps useful within human society?

Sat, 11/30/2013 - 09:57 | 4201693 Agstacker
Agstacker's picture

I hate to burst your bubble dude, but there is silver inside the computer you are sitting at right now.  It's not some data block with a unique ID number, it is an actual element that was mined out the earth and has the highest electrical conductivity of any element.

 

http://en.wikipedia.org/wiki/Silver

Sat, 11/30/2013 - 15:17 | 4202162 fonestar
fonestar's picture

What is inside the silver that makes it valuable if there are no humans to use it?

Nothing.

Wed, 12/04/2013 - 22:04 | 4216089 MeelionDollerBogus
MeelionDollerBogus's picture

For one, other non-humans eventually will evolve & probably will find a use for the silver.
For another, the time when humans are about to be gone is not yet here so your argument has no purpose.

Sat, 11/30/2013 - 21:46 | 4202787 MeelionDollerBogus
MeelionDollerBogus's picture

Idiot. It's called an atomic nucleus. It isn't magic but bitcoin doesn't have one & it's all that counts.

Sat, 11/30/2013 - 02:46 | 4201448 MeelionDollerBogus
MeelionDollerBogus's picture

Incorrect. Our physiology regardless of any thought is what gives physical value to physical money. Silver is antibiotic. Your conscious thoughts do not affect this. Gold resists corrosion. It is malleable & conductive. Your faith or lack of it has no affect on these properties ever.
Bitcoin has NONE of these properties. Estimation, speculation, guessing & fiat-exchange servers are the only connection of btc to the real world & it's a very tenuous connection based on faith, mistakes & guessing.

Fri, 11/29/2013 - 20:53 | 4200877 Professorlocknload
Professorlocknload's picture

So,,,BC is not a promise to pay? It just,,,is?

Fri, 11/29/2013 - 20:58 | 4200880 fonestar
fonestar's picture

Bitcoin is a system, just like the thousands of other systems the dunces here use on a hourly, daily, weekly basis without ever bothering to question.

Fri, 11/29/2013 - 21:15 | 4200915 nmewn
nmewn's picture

BitCoin is a system for money. Not money itself.

Thank you.

 

Fri, 11/29/2013 - 21:28 | 4200941 fonestar
fonestar's picture

I have never claimed otherwise.

Fri, 11/29/2013 - 22:01 | 4200992 nmewn
nmewn's picture

I believe we have a break through ;-)

Fri, 11/29/2013 - 22:15 | 4201015 fonestar
fonestar's picture

Bitcoin is a currency transmission system.  When you own Bitcoin, you own a portion of that network.

Fri, 11/29/2013 - 22:38 | 4201072 nmewn
nmewn's picture

"Bitcoin is a currency >>>transmission<<< system."

Well, I already know that...lol. And I really don't care who it gets transmitted to, if done voluntarily, ethically and under no misconceptions.

I would have left all of you alone if you would have just said that, instead of the marketing campaign of it being money.

Fri, 11/29/2013 - 22:51 | 4201104 fonestar
fonestar's picture

Go back and read my damn posts.  I have always said that Bitcoin was a currency!

Fri, 11/29/2013 - 23:18 | 4201150 nmewn
nmewn's picture

A currency based on what, exactly...faith...or hope or electricty?

And I still expect a rational answer to Mt.Gox being sold by Jed McCaleb for mere "fiat currency" and Satoshi being some sorta gawd ;-)

Sat, 11/30/2013 - 01:09 | 4201332 MeelionDollerBogus
MeelionDollerBogus's picture

Then you are now backtracking: you can't be a network for transmission of money and a currency at the same time.
They are EXCLUSIVE. Currency must be a derivative of money and never the network, just like SWIFT is a money network and not money.

Fri, 11/29/2013 - 22:39 | 4201076 dick cheneys ghost
dick cheneys ghost's picture

In all the bitcoins articles that I have read on ZH, I have never heard it described as this......'a currency tranmission system'.......thanks, I mean that. I admire ur moxy

Fri, 11/29/2013 - 22:53 | 4201108 fonestar
fonestar's picture

Satosh did it a disservice by calling it "Bitcoin" because it makes people think of an object (like a coin) and not a network (like p2p).

Fri, 11/29/2013 - 23:21 | 4201158 nmewn
nmewn's picture

Its called marketing.

Any used car salesman knows the concept ;-)

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