MoneyEconomists define money as a medium of exchange. Money is necessary in order for economies to evolve beyond barter systems.
For most of the recorded history of the world, this function has been performed by gold. It has intrinsic value and requires real resources to produce. It is universally recognised and is uniform and it is virtually indestructible. It cannot be manipulated. Gold is gold. The price of goods and services in gold was determined by their supply and demand. It was the natural choice as the world's medium of exchange and store of wealth.
CurrencyPaper money has no intrinsic value other than the paper it is printed on. Paper currencies began as gold receipts that acknowledged real deposits of gold coins and bars. It was convenient to use these paper notes to settle businesses transactions, which could then be exchanged back into gold. These paper receipts eventually evolved into banknotes.
InflationThe term "inflation" is currently being misused in the financial media to describe general price increases. Price increases result from one of three conditions.
1. Excess demand for goods and services;
2. An undersupply of goods and services;
3. An increase in the money supply resulting in too much money chasing too few goods.
Economists define inflation as an increase in the money supply. That�s it! Inflation is not the effect of general price increases. It is one of the causes of it.
Financial securityPrior to the twentieth century, the world had enjoyed relatively stable prices. Gold was the universal medium of exchange.
At the beginning of the twentieth century, price levels in the US were almost the same as they had been over 200 years before! Imagine reaching retirement age today and not having to factor in unknown future "inflation" to determine whether you could actually afford to stop working. We now face the very real prospect of 5% general price increases annually, or more.
GoldIn the aftermath of World War II, with much of Europe in economic ruin, the US dollar officially became the world�s reserve currency, tied to gold and with all other convertible currencies linked to it and therefore indirectly to gold.
Holders of US dollars (other than US citizens for whom holding gold was illegal) could present them to the US Treasury for conversion into gold.
During the 1960s, demand for gold was rising and US gold reserves were falling as a result of increasing US trade deficits. The solution was to either devalue the US dollar, or to enact policies to reduce the rising US trade deficit. President Nixon chose instead to discontinue US promises to redeem American dollars for gold.
The gold window officially closed on Aug 15, 1971. This was a de-facto declaration of bankruptcy. The US dollar collapsed as gold reached its peak of $850 an ounce by January 1980. To defend their currency, the US prime rate hit 20% three months later.
All you can eatIt is necessary to produce in order to consume. Unfortunately the US consumes 50% more than it produces. Consumption is endemic to its culture.
To fund a consumer society that consumes far more than it produces requires a balancing act with global participation. It must borrow from overseas, from the savings of nations that do not consume more than they produce.
Free from the burden of monetary discipline that gold imposes, the US Treasury is able to print dollars out of thin air and has done so for decades. The website of the US Bureau of Engraving and Printing is actually www.moneyfactory.com. Over the past five years alone, the stock of US money has increased from around $6.5 trillion to $10 trillion. This is called currency debasement. When this is done by a private individual it is called counterfeiting. Little wonder that US house prices have risen with more money chasing the same assets aided by a massive credit expansion and low interest rates. The printing presses are now so out of control that publication of the US M3 money supply was discontinued in March of this year.
The money factory
The current global fiat currency system is contrary to good sense and the laws of economics. This affects not just the US dollar but all paper currencies.
Despite his detailed awareness of economic theory, Ben Bernanke who replaced Alan Greenspan as Federal Reserve chairman this year is on record as stating that he would, if necessary, throw money out of a helicopter in order to keep the US economy going. It is not easy to reconcile a willingness to throw money out of a helicopter� with a stated policy of maintaining low inflation.
Dr Bernanke actually believes in the US printing press system. Mr Greenspan never believed in the system over which he presided. He simply did enough, in a most eloquent way, to keep it on life support.
Raising interest rates is a textbook way to "defend" a currency. At the time of writing, following the August Federal Reserve Board meeting, the US official interest rate has now risen from 1% in June 2004 to the current 5.25%. During this time the Euro rate has risen from 2% to just 3.0%. Despite this, the Euro has actually strengthened against the US Dollar!
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 [and "Helicopter Ben"], I advise you, as long as the capitalist system lasts, to vote for gold".
What value do you place on your financial security? It�s your money and your peace of mind.
Richard Colburn is a senior consultant with the Montpelier Group, a financial advisory group headquartered in Great Britain. Questions to the author can be directed to 053-839 463 or e-mail to
rcolburn@montpeliergroup.com 
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