Currency by Guy Williams
Last month’s column on crypto currency sparked a lot of interest and some interesting questions on crypto currency and currency in general. In the last thirty days bitcoin has surged in value, crashed, resurged and recrashed. This only reinforces our view that Bitcoin is a gamble, not an investment.
So, what is a currency? This is a question that we seldom think about, because the answer seems so obvious. Currency is the green paper that we carry in our wallets, and when we travel, we change green paper for colored paper that serves the same purpose which is to buy things.
The word currency comes from the Latin currens, meaning to run. The economic meaning is to circulate or to be in general use. Therefore, currency is anything that circulates or moves through the economy and, here is the important part, is also acceptable as a way to purchase goods and services.
Through the ages, many things have served as currencies; gold and silver were most common, but were preceded by salt, from which our word salary is derived. Stamps, tea, sea shells, and even stones were once acceptable means of exchange.
Over time we found that the best currencies were divisible - think making change - transportable, stable, widely acceptable, and a good store of value. A store of value means if you save some currency, you can use it to buy things in the future for a similar price, as you could have when you started saving. For many centuries gold served this purpose. In order to solve the difficulties of traveling with a large amount of gold, which was heavy, and bulky, paper money was invented. The original paper money was a commodity currency where each dollar represented gold in a vault. At any time, you could exchange your paper money for gold.
A currency backed by the general economy and the requirement that the currency be acceptable to pay debts and taxes is called fiat currency. The US dollar is a fiat currency. Some feared that fiat currencies could allow politicians to avoid difficult policy choices by simply printing money to finance popular projects without raising taxes to pay for the projects. In some cases this was correct, Germany went through hyperinflation between the world wars. Zimbabwe printed so much currency that it became essentially worthless. Argentina did the same, and currently Venezuela is printing way too much money, thus generating ruinous inflation and destabilizing the country.
Nostalgia for a simpler time and fears of hyperinflation lead some to lobby for a return to the gold standard and others to seek what they hope will be a safer haven in crypto currencies, such as bitcoin. Unfortunately the world economy is much too big and grows too fast to make a return to a gold standard possible or even desirable
For some bitcoin seems to be an attractive alternative, but is it?
The US dollar, compared to bitcoin is a much better currency. The dollar circulates freely, is divisible, transportable, acceptable, and a good, but not perfect store of value. Bitcoin on the other hand is divisible, transportable, but not generally acceptable, and is not a good store of value. Further Bitcoin has no controlling authority, like the Federal Reserve. Bitcoin thus has no ability to adjust to changing economic circumstances.
On the other hand, current policies make a fear of inflation something that cannot be dismissed out of hand. Next month we will discuss prudent inflation protection and steps that you can take to better insulate yourself from possible future inflation. Steps that won’t involve buying bitcoin.
Guy Williams is president and chief executive officer of Gulf Coast Bank and Trust Company. Their Kenner branch office is located at 3410 Williams Boulevard. Marcel Gonzalez, vice-president and branch manager can be contacted at 565-3656. Brian Behlar, vice president and commercial lender, can be contacted at 565-3661. Visit Gulf Coast Bank and Trust’s website at www.gulfbank.com.
Article Posted On: March 19, 2018 - By: Allie Munster