In the face of recent bank runs, bank failures and closures, it’s a good time to consider if we ought to modify our investment portfolios to truly be able to adapt to the changing economic landscape. Mike Maloney’s book Guide to Investing In Gold & Silver1 surveys a handful of events in history that shed a light into our current economic situation. In this and future articles I will rely on Maloney’s book to point out these lessons from history and how it applies to us today.
Keep reading to understanding how money and currency move in cycles. Then you can position yourself to really be able to grow your wealth whether the market is going up or down. At the very least, this will help to protect yourself and your family in moments of financial crisis.
But before getting into the first lesson from history, let’s first dive into the more philosophical question: what is money?
The Difference Between Money and Currency
Maloney poses the fundamental philosophical question: what even is money? Is there a difference between what we call currency and the word that we usually use, money?
The answer is yes, there is a difference. Currency comes from the word current, think of a river, or electricity. As Heraclitus said, you can’t step into the same river twice. That means that currency does not hold or store any value. It must keep circulating in order to survive. It is a medium of exchange and a means to transfer value from one party or person to another.
Money, on the other hand, can act as currency but it is not subject to its limitations. True money must have value intrinsically – it must have value in and of itself. Therefore it acts as a means to store value. Aristotle describes true money as possessing three characteristics serving as: 1) a store of value, 2) a unit of account, and 3) a medium of exchange.
Again, currency is also a unit of account and a medium of exchange. It is not a store of value and therefore does not qualify as true money as Aristotle defines it.
Money By Decree
Let’s think of a $100 dollar bill. A $100 dollar bill from 2023 is not the same as a dollar bill from 1923, a hundred years ago. Based on an average inflation rate of 2.91% per year, $100 from 1923 would be equivalent to $1,761 dollars today! And that’s the destiny of all currencies that have been implemented throughout history. In due time they lose their value. And for the simple reason that they lack the quality of true money. The quality that Aristotle described as being a store of value.
Modern currencies like we have today, like the US dollar (USD), the Chinese yuan (CNY), and the Mexican peso (MXN), are often designated as fiat currencies, meaning “money by decree”. This is because they are currencies simply by government decree, and are furthermore not backed by real money and instead are free-floating in regard to their value.
Now let’s look at an example from history that might shed a light into the value cycles of true money, currencies, and other kinds of financial assets.
Money Adventures in Ancient Greece
Gold and silver have been the predominant currency of the world for at least 4,500 years. But as far as being true “money” according to Aristotle’s definition, we can see the earliest example around 680 B.C. in Lydia, Greece. Metals were first minted here into coins of equal weight (unit of account).
This kind of monetary system reached a high point in Athens. Coincidentally, the first working tax system of the modern western world was first implemented in this city-state. As we all know Athens is often credited as the cradle of the modern civilized world and the first democracy.
We must then also wonder about how this great civilization came to fall and decline, and does this have anything to do with its monetary system.
Under its new monetary system, Athens eventually saw itself inside a war which turned out to be much longer than originally planned. After twenty-two years of war, supplies and resources started to dwindle. In due time funds began to run low. The Athenians had to figure out a way to continue funding the conflict. Thus they devised a way to do so through their monetary system.
Monetary Debasement in Ancient Athens
The Athenian politicians started to engage in what we know as monetary debasement. This is the process of chipping away or syphoning off at the value of a money or currency, in order to benefit from said value at the expense of it losing its worth.
Maloney illustrates how this debasement worked:
“In a stroke of genius the Athenians discovered that if you take in 1,000 coins in taxes and mix 50 percent copper in with your gold and silver you can then spend 2,000 coins! Does this sound familiar to you? It should . . . it’s called deficit spending, and our government does it every second of the day.”2
Before this debasement, everything you could buy in Athenian society was priced by the weight of gold or silver. Now, two sets of currencies were possible for market prices: one, the price in weigh of gold through coins that hadn’t been debased; and the second, the price in government currency that had been debased multiple times and which lost its value over time.
Eventually, the currency became all but worthless. Those who had held on to the original pure gold and silver coins saw a big jump in the value of their coins and probably enjoyed a level of protection from the catastrophe of a civilization in decline. The war that had started the debasement was lost and Athens declined both politically and economically.
What does this mean to us? With the recent shut down of Silicon Valley Bank and other major banks, we must be aware of this process of monetary debasement and of course know history. How can we put ourselves out of harms way if the system we are currently under starts to fall? Hopefully by reflecting on these lessons from history we will be more able to protect ourselves and our families for a better tomorrow.
In future articles we’ll touch on more examples from history and draw more close parallels to bank runs and bank failures from the more recent period of the 20th century.
1. Maloney, Michael. Guide to Investing In Gold & Silver. Scottsdale, RDA Press 2015.
2. Ibid, 7-8.