Abstraction and destruction: The fate of paper money

Generation by generation, real money becomes increasingly obsolete. The concept of money is already completely abstract to most, consisting entirely of computer entries and credit and debit cards. Fin24 reports that:

“After the United Kingdom announced earlier this week that cheques would be completely phased out by 2018, the Banking Association of South Africa (Basa) said it was inevitable that the country [SA] would follow suit.

…Head of corporate communications at First National Bank Virginia Magapatona said electronic banking methods are becoming the norm.

“We have noted a growing preference for electronic transfers among our customers, due largely to the convenience, security and low cost of these transactions,” she said. The use of online banking has increased by 20% during the past 12 months.

Newcomer Capitec has never offered its customers cheque facilities.”

The monetary system has evolved over the past century where users of money today don’t understand what real money is. When you tell somebody the R100 note they’re holding is nothing but a piece of paper with a government stamp on it, and that its catallactic character is no different to Monopoly money, you are gauranteed to get some very blank stares.

When central banking began to spread globally around the time of WWI, real money was gold or silver (it varied from country to country). Paper money (money certificate) were issued by commercial banks, which would circulate in place of the money specie (gold or silver). The gold or silver could be redeemed upon tender to the bank that’s issued the money certificate – it was a claim on real money. The money supply was therefore backed by gold or silver. Once the broader public became familiar with the paper money (in the general absence of bank runs and financial panics), and believed that paper money was the real deal, it became easy for government to remove the gold or silver backing (redeemability) of the money supply entirely. This is what happened after Bretton Woods in the 194os with the dollar exchange standard, and when US President Nixon closed the gold window in 1971. Since then all countries have been on floating exchange rates and use as legal tender paper money that is unbacked by money specie, gold or silver. So today everybody has in their wallets and bank accounts paper money that is just that: paper money.

It creates opportunities in countries like Zimbabwe where the currency is hyperinflated (or places where currency is being inflated at a slower pace, like everywhere else on planet earth) for astute observers to capitalise and get hold of their precious metals well before the public catches on to what’s happened to their life savings. Take a look at how some communities in our neighbouring Zimbabwe are getting by on a day-to-day basis, by exchanging one-tenth of a gram of gold for a loaf of bread or other goods. It’s not pretty, but it’s worth a watch. 

http://www.youtube.com/watch?v=7ubJp6rmUYM#watch-main-area