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Throughout the current financial crisis, it has become increasingly apparent to the average individual that money can be and has been created out of nothing. Although the complexity of the Federal Reserve and central banks all over the globe is beyond the scope of this commentary, it is important to obtain an basic snapshot of what money is.

Our Currency is Debt

In a speech in the Senate in 1833, Daniel Webster stated, 'We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.' All types of paper currency are pieces of debt. They are obligations of each issuing entity to 'make good' on a guarantee to repay. For example, The Federal Reserve, which is a private enterprise, prints money or issues digital currency that it then lends to the U.S. government. This is required to be repaid with interest. Not many people realize this relationship between the Federal Reserve and the government. Saying 'the government is just firing up the printing press' is a misguided assertion. As each new stimulus or bailout is penned into being, the debt connected to money creation becomes an ever increasing issue.

Good Money

Legal tender legislation has been created to give value to our currency as a medium of exchange. Good money, although, does not need legislation. Coins and forms of bullion composed of precious metals are valuable based on their metal composition. For thousands of years, silver and gold have been used as a store of value. Although their value may have short-term movements in relation to various currencies, the purchasing power of precious metals remains fairly constant over the long-term. Purchasing power is the ability to buy the same goods or services in the future as you can today. We have been trained to think that inflation is a typical thing, but essentially the increase in prices we notice is the purchasing power of our currency being withered away. One way to preserve your purchasing power is to buy silver bullion or gold bullion. In the 1950's all dimes, quarters and half dollars were made of 90% silver. Three dimes would buy a gallon of gasoline at the time. Did you know the exact same 1950's dimes (based on their metal value) would buy a gallon of gasoline today? That is how good money preserves purchasing power. Although cleverly disguised, our coinage today is made of no silver at all. Instead there are many other ways to invest in silver.

Bad Money

Even though ancient Rome used silver as their currency, they still invented a way to inflate their money supply. Corrupt money began to propagate because small slivers of silver were clipped off the edges of coins, melted down and used to make new ones. How similar is this to what is happening today? Since 1933, the dollar has lost over 97% of its purchasing power because as more and more is created, value is in essence 'clipped' from it. This has accelerated in the past 100 years because there is no connection at all between the dollar and any sort of valuable commodity.

Gresham's Law

Under legal tender laws, bad money drives out good money. This means that most of the pre-1964 coins that are 90% silver have slowly been collected and removed from circulation. It is a rare occurrence to get change back that contains any silver. If you do, don't put it in the parking meter downtown! As the gap continues to expand between good money and bad money, it is important to see that our monetary system impacts every one of us every day. Since money impacts all of us it would be prudent to follow the advice of long-standing federal judge Robert Hemphill who said, 'Money is the most important subject intellectual persons can investigate and reflect upon.' I encourage you to investigate.

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