RE: Do Currencies Need to be "Backed" by Something? The Difference between Currencies and Commodities
Thanks for the great post about a very important topic!
Gold cannot be replaced. Crypto coins can be. Gold will always be worth something even in a Mad Max scenario. We have modern day examples of this too. In countries where the currencies collapsed, people would pan in rivers for small amounts of gold to buy food for their families to eat.
Gold has a couple draw backs however. You have to protect it from theft, and it is not easy to bring your wealth with you when you move from one tax farm on the planet to another. Goldmoney.com allows you to use a credit card to purchase with gold though. They hold your gold in an account, and you buy and sell using the card as you would with other regular cards.
They do the accounting in the background. That type of system can easily be expanded globally too. It also gets around the moving your gold with you problem. You just have to trust the vault that holds your gold. That's a lot better than trusting governments to maintain the value of their currencies.
A lot of people say we are no longer on a gold standard, and I strongly disagree. Governments (banks) still stockpile gold. I'll stop when they do. They are stockpiling it, so technically that means we are still on a gold standard. Those governments know that it will always be valuable, and the rest of their economic decisions are affected by their gold reserves. This is also true for individuals.
All I know is that we need an easy way to make transactions with people without an easy way for governments to devalue what we use as currency. Goldmoney isn't the only way. Perhaps there's a better way. I'm not an expert. All I know though is that crypto is the opposite of Gresham's Law, and good coins will replace bad ones. Well, we never know when a better coin will come, so that doesn't make crypto a very good store of wealth in my opinion.
In other words, it may not always be worth something as gold is.
Thanks for your well thought out and reasoned reply!
I completely agree with your opinion on gold. I think it is probably the most useful commodity to use as a currency for many reasons. It, of course, has it's drawbacks as you've mentioned so I think that the best use of gold right now is as a reserve just in case the internet goes down or something equally crazy happens. Without the internet, I think gold is probably the best form of currency (though I will admit I haven't done much research in physical forms of currency). I think goldmoney.com and similar services are interesting but I think they defeat the point of having gold because if the internet goes down, you are in the same boat as anyone with credit cards, or cryptocurrency.
Gresham's law doesn't really apply to cryptocurrencies as far as I understand it. Gresham's law states that "good money is money that shows little difference between its nominal value (the face value of the coin) and its commodity value (the value of the metal of which it is made, often precious metals, nickel, or copper)". in other words it is referring to two coins that are legally required to be the same value. For example, if two golden eagle coins are legally required to be the same value even if one of them has imperfections. Cryptocurrencies aren't legally required to be the same value as anything and they are fungible (every coin is worth the same as any other coin) So I don't see how it applies. I could be missing something though.
I believe cryptocurrencies are a good example of Thiers' Law, which is kind of the opposite of Gresham's law. It says that in the absence of effective legal tender laws, Gresham's Law works in reverse. If given the choice of what money to accept, people will transact with money they believe to be of highest long-term value. However, if not given the choice, and required to accept all money, good and bad, they will tend to keep the money of greater perceived value in their possession, and pass on the bad money to someone else. In short, in the absence of legal tender laws, the seller will not accept anything but money of certain value (good money), while the existence of legal tender laws will cause the buyer to offer only money with the lowest commodity value (bad money) as the creditor must accept such money at face value.
So if the government doesn't enforce value, good money drives out bad money.
(this is a very interesting train of thought... maybe this will be a future post...)
So to sum up, I think gold is better without the internet and cryptocurrencies can be better when we do have the internet. (and there are some projects to make cryptocurrencies work without an internet connection which is really interesting...)
Thanks again! I wish I had a more powerful upvote for you... Someday. :)
Gresham's Law, as I understood it, was summarized as bad money replaces good money. By that I mean for example how silver money was removed from circulation to leave only non-silver money. Crypto is the opposite in that regard. Good coins will replace bad ones.
Completely agreed about how goldmoney.com suffers from the same issues as other currencies that depend on the bank, payment, and Internet systems to be up and running. I wouldn't consider gold to be the solution to those being down though. Silver and "junk" silver would be better alternatives. Gold would be reserved for very large purchases.
Good point. You would have to get a pretty small piece of gold to buy a candy bar...
The people in Africa were panning for tiny particles of gold to feed their families.
It actually has happened and is probably still happening. Look up the YT videos on it. The situation was very sad. :(
I believe it. I spent a month in Ethiopia several years ago. Very eye opening experience. My dad works for a charity that helps teach people in extreme poverty (<$1 a day) how to be self sustainable so he gets to see first hand what extreme poverty does to society... But there are a lot of good stories too when people get some hope and realize they don't have to wait for the government or the Americans to come and save them.
Interesting
I just realized that I totally misunderstood you about Gresham's law! haha, I thought you were saying that cryptocurrencies would fail because of Gresham's law but you were, in fact, saying that they represented the opposite! Which is exactly what I said in my comment about Theirs' law.
I am very embarrassed and beg your pardon. Thanks for the great input!