The Death of Money
The earliest forms of money were gold and silver coins. History can trace these two precious metals back in a continuous line for over 5000 years! In the latter part of the 13th century, Marco Polo witnessed the amazing sight of paper money being used in China in place of gold and silver. Hundreds of years before China had taken the first step away from "real money" for what seemed at the time a perfectly good reason. The darn stuff was too heavy.
Step One: Letter of Credit
In 806 AD, the Empire of China introduced letters of credit which allowed merchants to place their gold and silver on deposit with private concerns. These proto-banks would then issue a letter of credit for a fee. The merchant could then safely traverse the length of the land safely and unburdened until he reached his destination, at which time the letter of credit would be turned back into hard specie. Hundreds of years later the Knights Templar would grow rich with a similar scheme for pilgrims traveling to the Holy Land. Eventually, as the issuing firms grew ever more wealthy and powerful, they began evolving into the banks we know and loathe today. During this growth period, though, a peculiar thing was occurring. People were beginning to trade the letters of credit for goods and services among one another without bothering to convert them back to gold and silver coins. From this observation was born, no doubt illegitimately, the next step in the evolution of money.
(Centuries later the USA would issue Gold & Silver Certificates that were backed by a 1 to 1 reserve of the precious metals involved. Anyone holding the metal backed notes could exchange them at a Federal Bank for their equivalent in gold or silver. The Gold Certificates died in 1933 when our first Socialist president, FDR, killed them. The Silver notes died in the 1960's at the hands of another three initialed Democrat, LBJ.)
Step Two - The Fractional Reserve
The fees from the issuance of the credit letters were good, but they were limited by the amount of gold or silver on deposit backing them. To take better advantage of the new trading status of their issued credit letters as well as the perfectly good silver and gold lying dormant in their vaults, the clever bankers began issuing additional credit letters that were only partially backed by precious metals. They figured that there was always unclaimed letters circulating about, so there was really no need to have 100% of the metals available in the vault at any one time. In addition, the extra fees would support their further growth and power and the expansion of trade. Thus was born paper money backed only fractionally by precious metals.
Instruments today like the ETF's GLD and SLV are widely thought to be backed by only a fraction of the gold and silver for which the paper shares are issued. It's impossible, however, to know for sure since the custodians of these funds prohibit any independent audits!
Of course these fractional schemes didn't always work. Sometimes a rumor of insufficient gold or silver reserves would lead to a "run on the bank" and the ruination of the financial corporation caught holding the bag. However, enough success was achieved with this underhanded scheme to build banking empires like that of the Rothschild Family and to lead us to next final stage of this tragic comedy. The unbacked fiat currency.
Stage Three - Un-backed Fiat Money
Now we arrive at the third stage of the devolution of money. At this point both big government and the large banks are working hand-in-hand. Now even the half-lie of the fractional reserve is discarded. Wealth is created and dispensed by "fiat" or order of the central government in collusion with the banks. The government benefits from an ever expanding money supply by funding free-for-nothing social programs without the messy necessity of having to pay-as-they-go. The banks benefit by loaning ever growing sums of cash to the government, industry, and the consumer, funding unrestricted economic expansion.
The story of fiat paper money isn't all sunny, however. The evils of inflation, recession, and depression batter the common man on a regular basis. The average American now lives and dies in a perpetual slavery of debt and never-ending interest payments. Eventually, ever increasing spending and a ballooning money supply results in hyperinflation (by definition an inflation rate of at least 50% PER MONTH)! Revolutionary and Civil War America, Weimar Germany, Hungary, Argentina, Chile, Russia, Iceland, and Zimbabwe are a few historical examples of this dread economic blight.
Final Stage - Return to Gold & Silver or other real commodity
Weimar Germany emerged from their hyperinflationary period by the creation of the Retenmark, which was backed by bonds indexed to market prices (in paper Marks) of gold. It's impossible to know precisely what the US and the Western democracies will use to back their future currencies once they finally reach this stage. However, it is very probable that the "real money" of the past i.e., gold and silver, will play some part in the future drama. What we can say for sure, though, is that all fiat money schemes are destined to die and hopefully be reborn phoenix-like with a return to a "real money" economic grounding.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.