INVESTMENT COMMENTARY

PENNIES FROM HEAVEN

Economists define money as the common medium of exchange. Money is necessary in order for economies to evolve beyond barter systems. Money needs to have stability of value in order to maintain the exchange ratios between goods and services that are exchanged. Money needs to be objective and honest.
The history of money
The concept of ‘honest’ weights, measures and balances is found in some of the oldest books in the world, not least the Holy books of the 3 great religions that have their origins near the shores of the eastern Mediterranean.
More than 3,000 years ago, the 2 core components of honest and free trade were already established.
1. That which was being bought or sold was weighed and verified with accurate scales
2. If the transaction was other than barter, the money so used to complete the transaction was unbiased and stable in value. Stability of value is also necessary in order to act as a store of wealth, which is simply ‘money’ which is unspent and the second function of money.
Those same ancient books record that the function of money was performed by gold and silver.
Recent history
Under the US Constitution, the Founding Fathers decreed that the only money that would be legal tender was gold and silver coin. It further prohibited the power of Congress to emit bills of credit.
The Constitution did not give Congress the power to act as a deposit bank either, and it never granted Congress the power to create money (by printing paper) - only the power to ‘coin’ or mint existing gold and silver bullion brought to the mint as PRIVATE PROPERTY - not state property.
In the time old tradition of ‘scales and balances’, private individuals took their gold and silver to the US Treasury, where it was converted into standardised coins for them. These minted coins were proof that the money had been weighed and measured and so could be confidently used in trade as honest money, or held as a store of wealth.
In 1844 the US Supreme Court declared the 1844 Treasury note issue unconstitutional and therefore illegal. There has been no subsequent amendment to that Article of the US Constitution - and subsequent Supreme Courts have remained silent!
Currency debasement
Printing money in excess of economic growth devalues the paper money already in issue. How can paper currency be an effective store of wealth when it suffers automatic devaluation, courtesy of Government printing presses? Inflation is defined by economists as an increase in the supply of paper currency.
Simply put, there is more money chasing the available goods and services. Supply and demand laws mean that general prices rise and this ensures that the value of your paper currency is eroded year on year, in violation of our most basic and ancient traditions of honest measurement.
The real economic crisis
Under a real monetary system, ‘money’ must be earned and is in shorter supply. This has the effect of optimising the allocation of capital - and prevents weaker participants from entering the market. This monetary discipline prevents the grotesque boom-and-bust cycles that have been experienced during the fiat currency era, both current and historic.
A fiat currency financial system is like an athlete on steroids. Ethical considerations aside, steroids deliver significant and measurable improvements in performance but, long term, the physiological effect on the athlete is devastating and well documented. The United States is possibly the greatest ‘natural athlete’ that the world has ever known, but it is an economy on steroids and history is littered with accounts of how the mighty, using fiat currency, have fallen.
A real money system ensures that a unit of money today will have the same purchasing power as a unit of money in 30 years. Our present global fiat monetary system guarantees that a unit of money in 30 years will buy a small fraction of what it would today. According to the UK Chartered Insurance Institute, 1 British pound today has one tenth the purchasing power of a pound 30 years ago!
When viewed fully in this light, the monetary policy of the US and most other countries is a slowly devolving travesty of monetary destruction.
Nowhere to run
At current rates of interest, cautious investors who hold their money in cash and other interest paying debt investments are committing to a strategy that guarantees an erosion of purchasing power year on year, without the possibility of making any real gains.
There are options available to all investors, from the most cautious to the more adventurous that can build real value and security. A professionally qualified financial adviser can help you to design an investment plan that best matches your objectives and needs, as well as your other investment preferences.
Show me the money
In the words of George Bernard Shaw: “You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”
Financial security is ultimately about maintaining and growing purchasing power.
What value do you place on your financial security? It’s your money and your peace of mind.
Questions to the author can be directed to rcolburn@montpeliergroup.com or 0-5383-9463.

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