Not many people understand the true value of money, or how it really works. We promise, this won’t be an economics lesson – but there are a couple of points we need to make before we teach you all you need to know in order to get into bullion. First of all, unless you happen to be over a hundred years old, you’re probably not that familiar with precious metals and bullion outside of jewelry. To the average American, money means paper money – greenbacks – and more often that not today, money means digits in a bank account. Even paper money is going the way of the dinosaur these days.
BASIC CONCEPTS OF FIAT CURRENCY
The first key term you need to understand regarding paper money is fiat currency. Again, we’re going to use plain English to keep the economics lesson low impact: fiat currency is essentially money that is not tied to any other object from which it derives value. We’ll explain a little further. At some point, most of the world’s currencies were tied to previous metals of some sort – usually gold or silver. As an example, the British Pound Sterling was a paper bank note that was redeemable for actual gold coinage or bullion. You could at one point walk a British Pound Sterling note into a bank, and walk out with a corresponding amount in pure gold. Of course, this presented a bit of a problem. As the price of gold fluctuated, so did the amount of gold that could be bought with the note, and vice versa.
There is an interesting concept at work with the relationship with a note and corresponding precious metal – the only reason the note had any value at all was because it could be redeemed for gold. That, for most people, is a shocking revelation. Of course this presented somewhat of a problem for governments, who were the printers of all notes – they could only print so many notes, because the value of the note was tied to a fixed amount of gold. If they printed too many notes, and subsequently had too many people redeeming those notes for gold, there would obviously not be enough gold to back the notes.
This scenario existed for hundreds of years, with governments all over the world being kept in check by the principle that their currencies were backed by gold. This concept also kept government spending in check, because the governments of the world did not have the ability to print money out of thin air like they do today.