The biggest problem with paper money is that it can be created at will; and history shows that whenever paper money is disconnected from gold, it is eventually printed until it is worthless. Sometimes its destruction comes quickly, some over decades.
The second biggest problem with paper money is that it can be cancelled by edict, which is what just happened in India last Tuesday when Prime Minister Narendra Modi declared that 500 and 1,000 rupee notes — worth about $7.50 and $15 respectively — would cease to be money at midnight.
The plan is to introduce new bills with values of Rs500 and Rs2,000 that contain additional security features. Meanwhile, the highest legal tender note is Rs100, equal to about $1.50. And, withdraws now are limited to Rs2,000 per day of the new bills, increasing to Rs4,000 November 19.
The cancelled notes make up about 86% of the paper money in circulation in India. The people were given four hours notice that much of their cash would become “mere paper.”
However, the cancelled notes will not automatically become “mere paper.” The people of India will be allowed to deposit or exchange their old money at banks until the end of the year, but until then it will be illegal to use them anywhere except at government hospitals, pharmacies and emergency travel counters.
The reason given for the move was to stop counterfeiting and the use of “black money” in the underground economy. People making deposits of more than Rs250,000 can expect a visit from the tax authorities.
The advantage of using gold and silver for money, which was the case in the United States until the last century, is that they cannot be declared worthless by government edit. Yes, the government could declare it illegal to use gold and silver as money, but it cannot declare gold and silver worthless.
Gold and silver have been valued in all civilizations since the dawn of man. They will continue to valued in the future and can be exchanged for any new currency that gets issued by any government.