Money is a substitute for Gold, for that reason it is called soft currency. It is supposed to be backed by gold which is called hard currency.  Instead of having to carry around a pocket full of gold to purchase things, you carry the paper money. While gold which it represents is kept in the GOVERNMENT VAULTS. The main one being Fort Knox (a bullion depository where the majority of US Gold is kept). Every country has its own depository.

The reason why the governments does not print bunch of paper money randomly (at will) is because they have to have the gold to back the printed money.  It is like this:

If you have 1 oz. of gold and you have the exchange rate set up at $35.00 for 1 oz. of gold.  That means each time you spend $35.00, what you are really doing is spending 1 oz. of gold.  Now if the government decides to print up a whole bunch of money but still only has just that 1 oz of gold, then all that money is going to worth just 1 oz. of gold.

An example of that could be something like this.  Let’s say you just bought a new blow dryer and it cost you $35.00. Which means you paid 1 oz. of gold for your new blow dryer.  So you can say your blow dryer is worth 1 oz. of gold.

Then the government decided it needed more paper money in circulation so it printed up $35.00 more dollars.  But it still had only that 1 oz. of gold to back it with.

Then just when your 90 day warranty was up your new blow dryer burned up because lighting hit your house. You have to go buy a new blow dryer.  When you go to the store you almost have a fit because now the same blow dryer is going to cost you $70.00.  You grit your teeth and pay for it wondering why the price doubled.

The price did not double.  Your blow dryer is still costing you 1 oz, of gold.  But because the government printed up more paper money than it had gold to cover it, the paper money is worth less in hard currency or gold.  Now it is taking $70.00 in paper money to represent that 1 oz of gold instead of just the $35.00 in paper money when you bought the first blow dryer since they printed up twice as many dollar bills to be covered by that 1 oz. of gold, your paper money was worth only half as much.

The term for that is called inflation; which means the more money a government prints up without having the hard money namely gold to back it up the less the paper money is worth and the more things are going to cost in paper money.

More the paper money the government prints, the less the paper money will be worth in hard currency namely gold.  And if the government just keeps on printing more and more paper money without the gold to back it up the whole economy of the country will collapse.

This is what happened in Germany between World War I and World War II.  The German money actually got so worthless that the Germans had to take a wheel borrow full of money just to buy a loaf of bread.  Which in turn led to the collapse of the government and the rise of Hitler?


3 Responses

  1. This is good and simple to understand.

  2. very informative , infact ,when saddam asked oil payment to be made in gold
    , usa had to get rid of him, ,even noted economist mr venkatesh from chennai , has reffred to it in his lectures

  3. awesum history and briefing

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