The Weekly Sam: Argentina and Paper Money by Sam Blumenfeld


What the people of Argentina are going through is possible in any country that uses paper “money” as the basis of its economic activity. Today’s paper money has no backing and therefore is only worth what the government or central bank says it is worth. We call that kind of paper money “Legal Tender.” In other words, the government invests its faith and credit in the value stated on the paper note. Money is supposed to be a medium of exchange and a storage of wealth and we accept paper money because the government backs its stated value. But such a system can only work if the people have trust and confidence in their government and their government behaves responsibly. If we go back to the early days of economic activity, we find that barter was the earliest form of exchange.

A person could exchange a cow for sausages. In other words, one gave value for value. The medium of exchange was awkward and cumbersome, and the two individuals involved had to make value judgments about what they were getting for their commodity. But then it was found that gold would be accepted by many sellers in lieu of a perishable commodity as a medium of exchange, because of its scarcity and convenience. Gold also became an excellent storage for wealth. You could hold gold without its spoiling for as long as you wanted, and people would gladly exchange commodities for it. But then, as civilization ‘progressed, keeping gold became inconvenient. It could also easily be stolen. So, people began putting their gold for safekeeping in banks, and the banks issued gold certificates or banknotes. The banknotes were worth their weight in gold. But then the banks used the gold deposits as security for high-interest loans, which they made by issuing banknotes. But when the loans were not repaid, and the owners of gold cashed in their banknotes, the bank became insolvent, and their notes were no longer honored.

This was the case in early America, where the Farmer’s Almanack up to 1863 actually listed “Worthless and Uncurrent Bank Notes in New England.” Thirteen banks in Boston alone were listed as having worthless bank notes. None of today’s currencies have any backing at all except the faith and credit of the government behind it. In Argentina, the faith and credit of the government no longer exists. And so, its citizens hold paper money that has already lost half its value by government devaluation. The Argentine peso cannot be said to be a storage of wealth. Only those individuals who were smart enough to buy gold or U.S. dollars will come out ahead of the game, because they did not trust their government to maintain the value of Argentine currency. So, what is money today? The money that becomes figures in a computer must still be earned the old-fashioned way, by working for it, or earning it through prudent investment. That is, for most people. The expansion of government has made it possible to pay the needy in welfare checks and food stamps.

It is still possible to use gold as a storage of wealth. As long as paper money is susceptible to inflation, the dollar will continue to decrease in value. Thus, we have experienced exactly what the Argentines have experienced but over a much longer period of time. Those people in Argentina who owned gold came out ahead of everyone else, because the price of gold is set on the world market in London, and it is now worth as much as holders of the Argentine peso have to pay for it. Also, those who owned valuable real estate did well.

Once you understand the vulnerabilities of paper money, you have to invest your money and store it in ways that will maintain and hopefully increase its value. Putting it in the bank at today’s low interest will not increase its value. The stock market is still the best way to grow wealth. But you must buy stock in companies that you know will grow and prosper. Real estate is one of the best ways to store wealth, particularly in areas of increasing value. It makes sense to take advantage of today’s low mortgage rates to buy a house. Antiques and valuable works of art also make good investments. As for gold, it is a commodity. Its price is subject to periodic fluctuations caused by political and economic crises. There is no way of knowing for sure what the price of gold will be tomorrow. In other words, those who bought gold when it was $800 an ounce lost half its value as it declined to $350. It all depends at what price you buy it and at what price you sell it.

(The above article was written in the 1990s and is found among much of Sam’s work in the Sam Blumenfeld Archives: