bonds

By David Parkman

As economic systems advance and evolve, so too does their system of currency. From the earliest days of our ancestors, the exchange of physical goods used for survival has been a staple of human communication and the assignation of social standing. As humanity has become more sophisticated in communication and innovation, the necessity for direct trade of physical goods has been joined by a necessity for the trade of intangible goods and, importantly, intangible currencies. However, the move towards intangible trade through the development of increasingly immaterial currencies does carry dangers.

The fact that we’re moving away from tangible currencies has many advantages as well as many drawbacks. While it fosters economic globalization, it also means that concerns of security are rapidly changing, more rapidly than the average person can keep up with.

Barter

The trade of goods is the purpose of any system of currency. It all stems from the desire to exchange one good, perhaps one that is in surplus, for one that you don’t have yet. The barter system is the purest form of exchange because there’s nothing representative about it and there’s no immediate notion of “saving.” You acquire what you need by conducting a physical exchange of goods. The assignation of worth is immediate and direct. Barter of some form has been in action for tens of thousands of years, predating currency.

A system of pure barter has given rise to currency because not all trades are equal. To deal with this, currency is designed to be divisible, making it flexible. It also allows goods to be acquired without having an immediate product to trade.

Money as a Placeholder

Mathematics was developed to help our early predecessors identify people, specify dimensions in space, keep track of time, and inventory goods. Eventually, the concept was also applied to the more complex situations of exchange with numbers representing the goods in question.

Placeholders took the concept of representation a step further into the realm of the intangible. These were objects that would stand in for objects of actual worth in barter so that exchanges could be made without the physical goods present. In essence, a group of people would agree to transfer the idea of worth from a group of objects onto another, objectively less valuable object. This object is what we understand to be money.

The exchange of money as opposed to physical goods allowed more opportunities for trades to occur. Shells were commonly used as money throughout much of history in many cultures around the world.

Coins

Coins came into use as a way to standardize worth when dealing with money. The first appearance of coins was either in Aegina in Greece or Ephesus in what is now Turkey.

The inherent worth of many early coins was negligible, often made from clay. This fact made it harder to hold people accountable for cases of fraud. We might imagine that their introduction to society must have seemed strange to have a small token stand in for valuable goods seems suspiciously detached from the physical goods. But in modern terms, coins are considered remarkably tangible.

Coins are still circulated in almost every corner of the Earth, but the increasing amount of digital transactions makes coinage less universally useful. The elimination of the Canadian penny, for example, indicates that coins are losing favor. This is partly due to the inconvenient bulk of carrying around a large number of pennies (particularly in times of inflation when they’re worth less) as much as it is a revenue-saving measure by the Canadian government. This is a fascinating incident because the value of a penny is not going away, but its placeholder is. This makes the value of the penny not only more intangible than before, but also less definite as they implement a system of rounding to the nearest one cent value.

Coins can be carried and accessed at any time, but if you’re worried about security, they are also susceptible to theft. Most people store coins in their wallet or purse, occasionally digging them out for exact change, but more often storing them in jars to trade for cash.

Precious Metals

The exchange of precious metals, particularly gold, has been a form of currency for millennia. They’ve been highly valued and sought after primarily because they’re recognized as rare and desirable. Precious metals have therefore been conflated with the concept of wealth and extravagance, as they’re generally possessed by wealthy families and often used as highly visible adornments. While their estimated monetary worth is named as varying, this has more to do with the availability of the metals on the market and the value of currency than it does with the worth of the metals, themselves.

Precious metals are also unique in that they, unlike most currency, are actually limited in reality instead of limited by an authority. A visualization that is often used is that a block of the world’s discovered gold would fit underneath the Eiffel Tower. Gold, Silver, Platinum, and Palladium are the leading precious metals that are used in trade – they are difficult to counterfeit and there is always a demand for them.

Bullion

One of the reasons for the change to precious metal bars and coins was to ensure that a substance of inherent value was traded. Another reason was for authorities to control the flow of currency into the system and avoid fraud by regulating what coins looked like and were worth. This way, fewer people would be able to pass off counterfeit currency without any intention of honoring its supposed worth – this became a larger problem as groups of people grew in to larger towns and cities where it would be harder to hold individuals accountable for dishonesty.

Bullion is popular among investors because it is firmly tangible in a world that runs off of debt and credit. The prices of bullion metals fluctuate with the market as most commodities do, but they are secure in that they are scarce. Bullion adds an extra layer of value in the way the metals are graded and presented, with some bars being more valuable by merit of where they came from. Gold and silver IRAs represent a large portion of bullion (and precious metal) investing.

Paper Money

As the global economy expanded and more people became involved in the exchange of goods and currency, it became unsupportable to expect everyone to have the ability to possess an amount of precious metals equal to the physical goods they sold. Initially, some societies exchanged pieces of leather before graduating to the use of paper money.

The “gold standard” is the idea that the amount of (objectively worthless) paper currency in circulation could not exceed the amount of actual, physical worth available in the form of gold. The concept is that there is substance behind every dollar printed. This standard has since been abandoned in order to accommodate the huge demand for currency.

Fiat Money

Fiat currencies are those that are not backed by physical worth, but rather by the word or trustworthiness of the issuing authority, usually a government. When the US dropped the Gold Standard during the Nixon administration, the US dollar became Fiat currency. This is a hot-button debate among investors and economists alike as many see this as an ill-advised removal from the realm of the physical.

The argument against Fiat money usually hits on the idea that Fiat money isn’t inherently worth anything. The idea behind currency in its simplest form is that the unit of money has a set amount of physical good (often gold) that it can be traded for. Fiat money has no such guarantee of worth, allowing each individual unit of currency to experience shift in value.

Credit

Further removed from the sphere of physical good exchanges is the advent of credit. Credit is a representation of a representation, if you will. It is a system that acknowledges the complexity of a large economy, functioning off of where we expect money to be in the future as opposed to where it is now. In lieu of actual currency, credit functions as a network of tracking the movement of currency through an individual’s hands.

Credit is actually one of the more stable forms of exchange in that it isn’t a set unit that may be stolen. It is essentially the promise of future reimbursement and a record of how well the person involved has kept those promises.

It is possible, however, to steal someone’s good credit via identity theft. In this way, the theft of this particular form of trade requires far more than the transfer of units. It requires the theft of a person’s history and good name.

Stocks and Bonds

The stock market, by nature, does not have a physical form. It is representative of large scale trade, but does not always represent physical goods. There are stocks traded representing ownership or stake in coffee and other goods, but also stocks traded representing ownership or stake in commodities such as investment in a telecommunication company.

Bonds, by comparison, are essentially loans sold to the government in order to be exchanged again in the future for a higher amount. The fact that the bonds are paper situates it in the territory of physical worth that stocks do not possess. Stocks represent a volatile system of exchange that is fickle and often unpredictable. Fortunes can be made in stocks, but they can also be easily lost.

Cryptocurrencies

This storied history of currency leads us to the latest removal from the exchange of physical goods. Bitcoin, introduced in 2009, has since been classified as a form of cryptocurrency. This (completely intangible) digital currency was essentially conjured from the ether by an unknown person or group of people under the pseudonym “Satoshi Nakamoto.” The ephemeral and mysterious nature of its creators is echoed in its popularity and use.

The rise of multiple cryptocurrencies since Bitcoin represents a precipitous move towards trade that has not only a lack of physical representation but also a lack of strong regulation. The appeal of most cryptocurrencies is that their use removes the need to use banks and other such institutions to use money. This removes regulation, yes, but it also removes fees for moving and using money.

As with most other forms of currency, Bitcoins and other such units are only as powerful as the places that accept them. But, unlike many other forms of currency, it is on an accelerated track of boom and bust wherein its value can crash just as quickly as it can rise. The rise of Bitcoin theft, including a massive heist from the exchange site Mt. Gox, has added a looming threat of security over the currency’s reputation, which may or may not be resolved before its trading hubs are drained of resources.

Tangibility and Economic Downturn

In a world of such interconnectivity, it’s getting easier to forget how far apart we are, physically from one another. But if the thread of connection is cut between opposite sides of the globe and the data that holds our modern financial records is lost, for example via a massive EMP, how would we be able to continue to function as an economic system?

For the purposes of saving, some choose to think in terms of the now by having very few liquid assets. This mindset means a diversified portfolio of intangible resources and a trust in the system to continue to function fairly.

Others choose to keep one foot in the domain of the material by staking a claim on historically valuable physical goods. In the event of catastrophe or systemic failure, these people believe that possession of goods will be the safest way to secure their future. Bullion investments are generally regarded as safe due to their persistent value, even back thousands of years.

Counterfeiting and Security

Arguably the largest and oldest challenge for currency of any kind has been preventing counterfeiting. Since the acceptance of standardized money, there have been those that have tried to fabricate currency. Counterfeit currency has the potential to unbalance economic systems by causing inflation and the dissolution of trust in authority and currency. As technology has progressed, counterfeiting and security have become more synonymous as currencies are more attached to the name of the user.

The digital age of currency brings with it a new set of problems. Not only are there the traditional issues of counterfeiting and theft, but there’s the additional complicating factor that thieves can operate from anywhere on the planet. Highly skilled hackers can not only steal identities and enact credit fraud, but also steal from digital wallets.

Where a man could, in theory, protect his physical currencies without any specialized training to some effect, the skills required to guard cryptocurrencies are obtained through specialized tech training over years. Such training is not available to a large number of people and, therefore, the security of assets must be handed over to outside sources. Faith in the people we assign to protect our assets is one of the only defenses we have; luckily, the efforts of these people have to large extent been effective.

The Final Word: Finances and Savings

In many regards, the advancement of currency to intangible forms has been a natural progression because it is becoming easier to quantify goods with increasing accuracy. However, the fact that intangible currency is more ephemeral and easy to counterfeit means that security is becoming a larger issue for people in every tax bracket.

For personal finances, it’s important to recognize that any investment carries inherent risk. The nature of the beast is that there will be gains and losses that aren’t necessarily foreseeable. But the accelerated world of non-tangible (namely digital) commerce, despite being by and large secure, is harder to keep up with and backed by more nebulous collateral than our ancestors would recognize. To be on the cutting edge of finance, and often to make the most profit, one must be willing to take large risks on new technologies and paradigms.

Ride the wave or wait for confirmation of success, the age of Bitcoin is upon us. But don’t lose sight of what is actual and real and innately valuable- these are the things that will retain their worth even as history marches on.

David Parkman is a financial writer and student of economic history. He writes with American Bullion, experts in precious metals investing.