To answer the question succinctly, let’s go back to history……
Let’s start off by deliberating on what came before our present day’s central banking system.
The predecessors were the ‘loan banks’ and ‘deposit banks’.
Loan banks started out doing just what the name implies: they loaned money. Investors put their money in loan banks expecting to earn profits on the money loaned. When money is loaned, interest (or profits) is earned for doing without the money for a period of time and for taking risks (The loaned money may not be paid back). Deposit banks, however, began as totally different institutions from loan banks.Originally, deposit banks offered bailment services. They would accept items such as gold and silver and issue receipts. On presentation of the receipts, the items were returned to the depositors. Deposit banks earned profits by charging for their bailment services; loan banks earned profits by charging interest on the money loaned.
In a series of English court decisions, the line between loan banks and deposit banks was not blurred but erased. Those decisions resulted in the evolution of monetary system that today permits banks to be the great inflators that they are (old court decisions in England).
Many critics of our monetary system lay the blame for inflation solely at the feet of the Federal Reserve System, through its purchases of debt instruments with money created out of thin air. However, the greatest creation of money out of thin air comes on the books of the banks when they make loans.
While the Fed itself is not the biggest inflator, the very existence of the Fed, the central bank of the United States (and the rest of the the world), encourages banks to collectively be the primary cause of the inflation of the money supply.
Probable Solution To Today's Banking Challenges: Free Banking
Rothbard, the author of ‘The Mystery of Banking’, offers an explanation of free banking, which, unfortunately, has never been tried in modern times. Under free banking, banks can inflate if they want but if their depositors get wind of it and want their deposits returned, the banks do not have central banks or governments to bail them out. Under free banking, the government could not suspend the redemption of paper receipts for specie (gold and silver coins). In short, the marketplace monitors the soundness of the individual banks. The banks must earn the respect of the populace. The populace, in return, has no government or central bank “guarantee” that their deposits will be safe. Free banking requires diligence by depositors.
In today’s financial world, this may seem a reckless notion, that the marketplace can monitor the banks. But, it is not. If the banks did not have the assurances (written or otherwise) that the governments would bail them out, would they not be more careful with their lending policies? And depositors would do their due diligence before depositing with just any bank.
Advocates of free banking assert that it has only been tried once: in Scotland, 1727 to 1845. Scotland during that time had a highly developed monetary, credit, and banking system. Further, there was no governmental monetary policy, no central bank, and virtually no political regulation of the banking industry. During those nearly one hundred twenty years, Scotland enjoyed remarkable macroeconomic stability.
But, free banking, in its pure form was not practiced in Scotland 1727 to 1845. Several times, when the banks issued too much paper, the government permitted them to suspend redemption in specie (coin money). As long as the government stands ready to abolish the redemption right of receipt holders, free banking is not practiced. Still, Scotland enjoyed great prosperity and with a stable monetary system while many of the features of free banking were practiced.
Because of the flaws of today’s fractional reserve banking and current uncertainties in the markets, precious metals are the main beneficiaries .
Metals rallied recently as the U.S. dollar turned lower, fears of the sovereign-debt crisis intensified after Ireland agreed to a bailout, and some good economic news boosted hopes for increased demand. All this uncertainty is driving precious metals higher.
Of course, the money creation by the [Federal Reserve] and [European Central Bank] is driving their currencies down and, thus, commodities are rising.
Adding fuel to the rally was news lately that China’s securities regulator has given the green light to a mutual fund to invest in foreign exchange-traded funds backed by gold and silver.
The Next Big Thing
This brings us back to answering the question :”where to put your money?” The answer may be obvious, it’s “Gold”,….really, quite close but to be specific , it’s “Silver.” Silver is simply The Next Big Investment in this decade.
Why Silver Is The Next Big Investing Windfall ?
Gold has traded at a ratio of 16-to-1 to silver in terms of price, but today it trades in the range of 50 to 1. Metal experts think the gold-to-silver ratio is going to go back to 16 to 1 given the passage of time, say three to five years. And they bet that silver will overshoot. The gold-to-silver ratio may even get down to 10 to 1. They believe that the price of silver has been overly suppressed.
For more reading on: Why Investing In Silver? Click HERE
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