Friday, February 09, 2007

Paper Money

Taken from The Malay Ideals on the chapter of "Wealth and Poverty"

Ideally, all currencies in the world must have an intrinsic value. Gold for example was once the internationally acceptable, age-old currency. However it was done away with and forgotten because it was thought to be inflexible in determining money supply since its supply was limited. The function of gold as the world's standard currency was then replaced by the currency of the world's strongest economy - the US dollar - which carries no real value except the figure that is printed on it. We are of the opinion that linking currencies to a valuable and sought after commodity will allow the currencies to maintain its value, remain relatively stable and less subject to sheer speculation. Better still if this standard itself is directly used as a currency because this averts the arbitrary determination of a value of a currency based on a nominal measurement of the standard which does not reflect its true value.

It is evident that many of the financial crises that hit the world, such as the devaluation of a currency, inflation, hyperinflation, deflation and the loss of confidence on a particular nation's currency is a direct result of the use of paper money which carries no intrinsic value. Paper money is accepted only on the basis of faith and trust. In the past, paper money is a promissory note that payment is to be made at some time to come or upon demand. Since currencies are no longer linked to a gold standard, payment in gold is no longer necessary. Paper money itself is then considered to be the payment. The value of a currency and the supply of "wealth" can then be manipulated easily by speculators, the banking institutions and governments. As such, the wealthy can lose the value of their riches in a single day. A nation's debt may double or triple within just a few days if it is unfortunate. There is no stability in the value of a currency and there is no stability in the value of riches. Stability is determined only by the people's sole faith in paper money, by pegging or floating their currencies against what is thought to be the most stable currency in the world  the US dollar  which is maintained still by faith alone. A currency that is an acceptable standard with an intrinsic value will address this issue and prevent a nation's financial meltdown or collapse.

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