The proponents of every new currency history have to make one very important choice. What will the unit of account be based upon?
Currencies based on metals have been the most successful. The number one reason is their inherent resistance to inflation.
The value of anything is tied to its scarcity. Gold and silver retain their value because there is only so much of it in circulation and only so much new gold or silver that can be mined in any given year. Mining, minting and distributing gold and silver coins has a cost that ensures that the market can never be flooded with it. History has shown that the supply of new gold and silver has remained remarkably stable for centuries.
Unlike a paper currency, which can be inflated at the whim of politicians or bankers, precious metals remain scarce regardless of efforts to inflate.
Paper currencies have exactly the opposite tendency. Politicians and bankers have been eager to increase the volume of paper currency as consistently throughout history as the public has been to possess gold and silver. Often, the intentions are good. Many economists and public figures believe that an “elastic currency” will better meet the demands of the market, keep people employed and encourage new production.
Regardless of good intentions, precious metals-based currencies have succeeded and paper currencies have failed. The U.S. dollar almost doubled in value while based on gold during the 19th century. It lost over 90% of its value as a paper currency during the 20th.
Precious metals-based currencies do not rely solely on confidence in politicians or bankers not to inflate them nor third parties to continue to accept them as units of exchange. Precious metals also have an intrinsic value. In addition to their value as a unit of exchange, precious metals are valued for use in jewelry, industry and technology. An ounce of silver has worth apart from its use as money. Paper currencies do not.
Even a precious metals-based currency can be representative or commodity. Representative money systems use paper bank notes that are redeemable for a certain amount of gold, silver or some other hard asset. This makes them significantly less susceptible to inflation. The issuer recognizes that each note represents a claim to a scarce amount of gold or silver.
However, representative money isn’t full-proof. It still relies on confidence. Holders of the notes have to trust the bank to actually keep enough gold or silver on hand to redeem all of the bank notes it has issued. They also have to trust politicians not to allow fractional reserves, meaning allowing bankers to keep less than enough gold or silver on hand to meet all of their obligations.
Not only have politicians and bankers failed to keep this trust with metals-based currencies, they have failed to do so even with paper. Currently, U.S. banks are required to keep only 10% of their total deposits on hand. When you deposit $100 in your savings account, $90 is immediately loaned out at interest while still represented as available for withdrawal by you. It’s not hard to understand why the dollar loses value under such a system.
Commodity currency systems like OpenCurrency do not rely on trust in third parties at all. Holders of these complimentary currencies have the intrinsic value of the coin in their hands at all times. A tenth ounce gold or silver coin is a tenth ounce of gold or silver regardless of the decisions of others. Merchants selling their products for a commodity currency are guaranteed equal value for their goods. That value remains whole over time for future consumption or investment in new production.
A commodity currency system based upon precious metals is the best complimentary currency in a world of inflated paper.