Currencies are one of the oldest human inventions. Since the dawn of civilization, people have been assigning value to abstract materials and using them to trade goods and services. Even some primates exhibit this behavior, meaning that the use of currencies is probably one of the deepest evolutionary instincts that people possess. It’s important to understand the way that currencies work if you’re considering engaging in precious metal investing.
In the past, currencies consisted of precious metals, like gold and silver. As states evolved, they began to establish central banks. These central banks printed coins and bills made of commonplace materials that were directly tied to precious metal reserves held by the bank itself. Most modern currencies are no longer backed by the power of true precious metals—instead, they’re backed exclusively by the power of the state. This type of currency is called a fiat currency. Fiat currencies are especially vulnerable to a wide range of issues, including currency manipulation, over-inflation and political change. Here is a basic breakdown of the life cycle of a fiat currency:
- Market emergence: Every human civilization has seen the rise of a market economy. This simply means that people trade goods and services with one another. As civilizations evolve, however, they eventually stop trading goods and services directly, and instead implement a money system. In most historical societies, dating back to ancient times, money has been based on gold, silver and bronze.
- Regulatory growth: After a market emerges and money becomes commonplace, governments begin to institute regulations and reforms designed to keep the market moving smoothly. Generally, these regulations usher in a period of growth for the market and the controlling government.
- Governmental monopoly: Eventually, the government will declare a monopoly over the production of currency. The government often begins by establishing a central bank, responsible for issuing currency. Notable modern exceptions include the United Kingdom and Hong Kong, which contract currency minting to several different private banking institutions and corporations.
- Currency debasement: After a time, the government will need to print more currency in order to pay for its continued operation. This is called currency debasement, or over-inflation. This begins a long, slow process of currency collapse. When too much money enters the market, the personal savings accounts and assets of citizens begin to diminish in value.
- Currency collapse: Thanks to the loss of personal property value, the currency will eventually collapse. This occurs either because people have lost faith in their government’s ability to issue, regulate and manage money, or because the government itself has fallen.
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Categorised in: Precious Metal Investing