Metal coins have been around for thousands of years. They’re small, convenient, and easy to recognize. And until recently, they usually represented a specific amount of precious or semi-precious metal—typically gold, silver or copper. On the other hand, large quantities can be heavy and hard to handle.
Paper money evolved to solve that problem. Originally issued as promissory notes redeemable in specie (gold or silver), they were light, small, and easy to produce. And sometimes they weren’t worth the paper they were printed on.
So is one form of money better than another? That depends largely on your economic and political philosophy. Let’s take a look.
The Pros and Cons of Metal Money
Metals have intrinsic value. An ounce of gold is an ounce of gold regardless of other factors. It, along with silver and other elemental metals, exists only in nature, so it can’t be artificially created—at least so far. Alchemists have been trying for centuries without success. Its supply is limited, so its value comes from its scarcity, and that’s why societies have chosen gold and silver as money for thousands of years.
Even as paper money came into existence, it typically stood in for a specific amount of gold or silver on deposit in a national treasury. When you dealt in gold or silver, you didn’t have to concern yourself with where it came from or the stability of the country or institution you got it from. That made transactions straightforward and simple.
But when trade occurred in large quantities—funding a war or some other massive undertaking, for instance—transferring enough gold or silver to pay for it became logistically difficult. Plus, if a country or business needed to spend extensively outside its borders, it had to take that money out of circulation to ship it abroad, causing economic problems at home, even possibly bankrupting that country.
The solution lay in using paper money that was backed by gold or silver.
The Pros and Cons of Paper Money
If paper money solved some of the liquidity problems inherent in precious metals, it brought along its own set of concerns. As far back as the Yuan Dynasty in 11th century China, paper bills have been used as stand-ins for specie money, usually when supplies of gold or silver had run low. The presumption was that “real” money would be available soon and the bills could be redeemed for it. Of course, promises are only as good as the persons (or governments) making them, and that makes a lot of people nervous.
In the early U.S., paper money was often issued by banks or states or even private businesses. The federal government was only authorized to issue coins by the Constitution but the Civil War forced Congress to authorize printing of Demand Notes and U.S. Notes as the first official U.S. paper currency for general circulation. After the war, these were replaced in 1865 by gold certificates and in 1886 by silver certificates redeemable in those coins. Private ownership of gold was suspended from 1933 to 1964 and the dollar was decoupled from gold in 1971, making the dollar a fiat currency backed only by faith in the government and its assets.
Paper money is fragile—it can be destroyed much easier than coins—but what concerns a lot of people is that it can also be issued without any backing. If a nation needs more of it, it only has to print more, and that can lead to hyperinflation and economic disaster. So faith in paper money requires faith in the government issuing it, and for some people, that’s a problem.
What’s the Answer?
Each type of money comes with its own set of pros and cons. Coins are impractical in all but small transactions, and paper money requires trust. The truth is, though, that paper money is here to stay and is unlikely to ever be backed by silver or gold again. The good news is there’s plenty of it around, so getting your hands on it isn’t very hard.
Holding some gold or silver in coins or bullion might be a good hedge against inflation or disaster, but relying on them for everyday use is impractical, at least under current economic conditions.
If you’d like to change some of your paper money into more tangible items, The Great American Coin Company® has many options for investors. Browse our site to find your next piece!
